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Morgan Chase fails to report gold derivatives to SEC, shareholders

Section: Daily Dispatches

By James Turk, Editor
The Freemarket Gold amp; Money Report
(Copyright 2002, all rights reserved)
August 4, 2002

There has been a flurry of letters from the
Federal Reserve and the Treasury Department
responding to various inquiries about the
federal government's activity in the gold
market. Not surprisingly, these letters make
the same contention as other letters I have
seen in the past -- specifically, they
contend that the federal government has not
been intervening in the gold market.

The Fed and Treasury letters were written in
response to inquiries by various supporters
of the Gold Anti-Trust Action Committee Inc.
( who had asked their
congressional representatives to investigate
the evidence presented by GATA that the gold
price is being managed by the federal
government, working in concert with a few
large bullion banks. Because these Fed and
Treasury letters mention me and some of my
work, I am compelled to respond.

The letter from the Federal Reserve to U.S.
Sen. Christopher J. Dodd is the easiest to
deal with. Written by Donald Winn, assistant
to the board, it states: quot;Contrary to Mr.
Turk's assertions, the Federal Reserve has
not engaged in a gold swap with the

Interestingly, I have never asserted that the
Fed has been engaged in gold swaps. I have
always contended that the gold swaps are
being made by the U.S. Exchange Stabilization
Fund (ESF). So this statement by Winn is
curious. It makes clear that Winn has not
read my work, or alternatively, he is
attempting to disinform those who read his

Please keep an open mind about this last
point. Before you conclude that the Fed would
not deliberately attempt to disinform members
of Congress or the public, consider the word
game being played by Winn with the following
statement: quot;As Chairman Greenspan has
previously stated, the Federal Reserve owns
no gold and therefore could not sell or lease
gold to influence its price.quot;

This statement is accurate. The Fed owns gold
certificates that give it a claim to the U.S.
gold reserve; the Fed does not own bullion
itself. But what's important about this
statement is what is left unsaid. We all know
that the Fed does not own gold, but does it
OWE gold?

If the Fed borrowed gold, it would not own
that gold. But that physical bullion it
borrowed could be sold or leased to influence
the gold price. Is the Fed doing that? Winn
isn't saying.

The Treasury Department letters are written
by Assistant Secretary John Duncan. The ones
I've seen are identical, and I'll use his
letter to Sen. Mitch McConnell for reference.

The letter starts well enough: quot;The article
['Accounting for the ESF's Gold Swaps'] makes
several assertions. I will respond to each
of them in turn.quot;

Unfortunately, as we'll soon see, Duncan
doesn't. But there is a bigger problem with
his letter.

Duncan implies that he has authority to speak
on behalf of the Exchange Stabilization Fund.
But he doesn't. Only the treasury secretary
and the president have that authority. And
neither of them will respond in writing to
the evidence that the ESF is indeed engaging
in gold swaps.

So this letter from the hapless Duncan is
pure disinformation because he does not have
any authority to speak for the ESF. But let's
take a look at it anyway because we'll see
from it that the disinformation campaign

Here is what Duncan says I am asserting: quot;The
Consolidated Financial Statement (CFS)
indicates that the Exchange Stabilization
Fund (ESF) has liabilities in the form of
Special Drawing Rights (SDR) Certificates and
of SDR allocations from the International
Monetary Fund. Information on this has not
previously been published.quot;

I have never said that this information had
not been previously published. In fact, if it
hadn't been published, how would I have been
able to analyze it in the first place? This
is absolute twaddle by Duncan.

Duncan more accurately states the next
assertion he says I make. quot;The ESF exchanges
SDR Certificates with the German Bundesbank
in return for gold to put on the market
through off-balance sheet loans. This
exchange is why the SDR Certificates
disappeared from the ESF's books.quot;

That is my point precisely, and here is
Duncan's response.

quot;By law, the secretary of the treasury is
authorized to issue SDR Certificates only to
the Federal Reserve System. The SDR
certificates went off the ESF's books because
they were redeemed by the Treasury Department
with the secretary's authorization. The
visible result in the ESF's balance sheet was
a decline in the liability item for SDR
certificates and a corresponding decline in
the asset item for the ESF's holdings of U.S.
government securities at the Bureau of Public
Debt. The ESF redeemed the U.S. government
securities in return for dollars to use in
redeeming the SDR certificates from the
Federal Reserve System.quot;

Perplexed? So was I when I first read this
response by Duncan. It took me a couple
of readings, but then I realized why I was
perplexed. It is clear that there is no
answer here to my assertion. All Duncan
explains is the mechanics of how the SDR
certificates were redeemed. He does not
explain why they were redeemed, nor does he
explain what happened to the actual physical
SDR certificate after it was redeemed.

It has been my contention that the SDR
certificate was given to the Bundesbank as
collateral after it was redeemed, and
further, that this transaction would occur as
an off-balance-sheet item on the ESF's
financial statement. Duncan's so-called
answer to my assertion is in reality a non-
answer. But non-answers are useful too.

I always assume that a non-answer is a quot;yes.quot;
Duncan is being evasive. Because of Duncan's
long-winded technical explanation, the casual
reader may think that Duncan answered the
question, and will then read on to the next
point. But by not denying my assertion,
Duncan leaves my assertion unchallenged. So I
take his reply as a quot;yesquot; -- that the ESF is
exchanging redeemed SDR certificates with the
German Bundesbank in return for gold.

The third and final statement by Duncan to
explain my assertions is: quot;The CFS
[Consolidated Financial Statement of the US
government] and the Treasury Bulletin report
different amounts of foreign exchange
reserves because the CFS presentation nets
out foreign exchange liabilities.quot;

Mr. Duncan's response here is interesting.
quot;The difference reflects the fact that the
Treasury Bulletin reports total U.S. reserve
assets and that this total includes the
foreign currency assets of the Federal
Reserve System, which is not a U.S.
Government agency and therefore is not
covered in the CFS. The CFS covers only the
reserve assets held by the Treasury

Some readers may not be aware that the
Federal Reserve is not part of the U.S.
government. The Fed is privately owned, so
Duncan is saying that it is not consolidated
into the financial statements of the federal

But that leaves unanswered the question as to
why the Fed's assets are reported as U.S.
reserve assets in the Treasury Bulletin. Is
it to make the U.S. reserve assets look
bigger than they would otherwise be if the
Fed's assets were excluded from the report
appearing in the monthly Treasury Bulletin?

So again, we are left with more questions
than answers.

It need not be that way. All we need is for
the treasury secretary or the president --
who are the only two people with authority to
speak for the ESF -- to simply explain the
evidence presented, compelling evidence that
the ESF is engaging in gold transactions.

Explain the evidence. It if is not related to
gold transactions, then explain what it is.

Just by explaining the evidence, the treasury
secretary or the president could put an end
to this so-called speculation that the ESF is
engaging in gold transactions. It would be so
simple for them. All they need to do is
respond with a short letter to the member of
Congress enquiring on behalf of his concerned
constituents about the U.S. gold reserve. A
short statement to the press would do as
well, explaining why the accumulated evidence
is wrong and that the ESF is not engaging in
gold transactions.

But there is nary a word from either the
treasury secretary or the president denying
that the ESF is engaging in gold
transactions. I wonder why.