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AfLease executives pledge their shares for company loan instead of hedging

Section: Daily Dispatches

2:37p ET Thursday, June 26, 2003

Dear Friend of GATA and Gold:

Thanks to Gary North for his permission to share with
you Issue 5 of his series of essays, quot;The Gold Wars.quot;
Issue 5, appended here -- quot;Is America's Gold Gone?quot;
-- quotes GATA consultant James Turk and GATA
Chairman Bill Murphy.

Subscription to North's quot;Gold Warsquot; essays is free. Just
send an e-mail request to:

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

* * *

Gary North's
Issue 5


I sent this report to Remnant Review subscribers in
February 2002. I want to share it with you, even though
the gold market has long since confirmed what I wrote then.
I want you to understand why I believed that gold had
bottomed in 2001, and what the forces are that will push
gold's price higher. I still believe it.

Pay close attention to my discussion of James Turk's
reports. Turk believes that the U.S. government has
quietly leased out all of its gold. If he is correct, then
the government cannot get it back. Gold's borrowers have
paid about 1% per year to borrow the gold. Then they sold
it, pushing gold's price down. Then they took the money
and invested it at market rates -- over 7% when the leasing
process accelerated sometime around 1997. It was a sweet
deal until gold's price started upward. Now it threatens
to bankrupt the so-called gold-bullion banks.

If Turk is correct, the banks that are in debt in gold
bullion cannot buy it back to repay their debts. If they
try, gold's price will soar.

I warn you, this information is arcane material. The
average Congressman knows nothing about it, let alone the
average voter. But gold investors should be aware of these

I begin with an article written by two economists, one
of whom worked at the time for the Federal Reserve System.
It was published in 1997. You can read it here:

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The authors wrote that if every central bank sold all
of its gold in one gigantic auction, the price of gold
would decline by about 11%. The price in 1997 was $350. A
gigantic, one-shot auction by central banks would drop the
price to quot;about $309quot; (p. 3). (Only academic economists
would be as specific as $309.)

Here is part of what I wrote in 2002. . . .

* * * * * * *

What if the United States were to sell all of its gold
in one shot? What price effect would this have? Gold
would fall by $10 an ounce, the report says.

Up to this point, we have considered actions that
might be taken by all governments acting
together. Of course, one government may sell
even if others do not. As shown in Chart 6, if
the United States sells all its gold but other
governments do not, the price is estimated to
drop only to about $340 [down from $350 -- G.N.].
U.S. receipts are about $89 billion, about 10
percent higher than if all governments sold. A
credible announcement by other governments that
they intend to sell gold soon has almost the same
effect as an immediate sale (p. 5).

Now, I'm not sure they were correct in 1997. No one
can be sure. I think such a sale would have dropped the
price by more than $10. But this is what the document

The report's paragraph ends: quot;Thus, the U.S. example
illustrates the consideration that each government makes
more revenue if it sells before other governments either
sell or announce a sale.quot; This insight surely isn't going
to win its authors a Nobel Prize. Of course it's better to
sell before others do. But this assumes that central
bankers will take the authors' advice and sell all of their
gold at one time, which is what the authors recommend. The
paper calls for coordinated selling. But they offer a
fall-back position: leasing. I will return to this theme
later in this report.

In the paper, there is a chart of the distribution of
gold, government vs. private. The chart counts the
estimated gold in mines, which seems strange. Gold in the
ground affects today's price only indirectly, insofar as it
suggests possible increases in supply over the years. If
you wanted delivery of gold today, gold in the ground would
do you no good.

A lot of gold is flowing into Asia. India's fathers
endow their daughters with gold jewelry before a marriage.
This is the property that they bring into the marriage.
This is an old tradition. It will not change soon.
Meanwhile, Indians are getting steadily richer. They can
buy more gold. Dowry gold rarely comes back onto the
market except during economic crises, such as famines.
India is steadily becoming a free market society, and
famines are rare in free market societies. Japanese
investors have begun to buy. There are indications that
the central bank of China is buying more gold than
previously estimated.

This means that if there were a rising price of gold
because of fears about inflation or, far more interesting,
realization that the central banks have quietly leased out
most of their gold and cannot sell any more to keep down
its price, then Indian wives are unlikely candidates to
supply gold in a panic move upward. At some price, yes,
but would be a very high price.


There is a very interesting section on gold leasing.
The authors regard leasing is a viable alternative to
actual gold sales. I believe that their advice here has
been taken. I think it began over a year before the essay
was published. There has been no formal announcement of
this change in policy. There are other indications that
central bankers have used gold leasing as a way to keep the
price of gold declining. The authors argue:

Governments can achieve a welfare gain roughly
equal to that from an immediate sale through
alternative policies. One such policy is
specified in the bottom panel of Chart 5. Under
this alternative policy, governments loan out all
their remaining gold in each period. In the
future when all gold now owned by private agents,
whether above or below ground, has been used up,
governments sell in every period whatever gold is
necessary to make the price be what it would have
been if they had sold all their gold immediately.
The quantities of gold available for private uses
are the same under the alternative policy as with
an immediate sale. However, there is an
important difference: under the alternative
policy, governments relinquish title to their
gold in the future and then only gradually.
Therefore, to the extent that government uses can
be satisfied by owning gold but not physically
possessing it, most if not all of the gains
associated with maximizing welfare from private
uses can be obtained with little or no reduction
in welfare from government uses until sometime in
the future (p. 5).

Here we have the key that may unlock the question,
quot;Why did gold fall from $350 to $280 in 1997?quot; Analysts
have looked for the answer in central bank sales. Only
Great Britain and Switzerland have been selling much gold.
Great Britain next month will conclude three years of
auctions of 365 tonnes, half of its gold reserves. In
September, 1999, there was a 5-year agreement by central
banks that they will not sell more than 400 tonnes a year,
combined. The IMF agreed to this. But this agreement did
not include leasing.

In a follow-up paper, the authors explained their

Governments can make gold available for
private uses through a class of policies
involving equivalent combinations of gold sales
and gold loans. A gold loan involves receiving
gold today and returning the same amount of gold
and a loan fee at some future date. For
simplicity, we focus most of our attention on the
case of a sale of all government gold. A policy
that is equivalent to a sale of all government
gold in a given period is a commitment in that
period to lend out at the beginning of every
future period all remaining government gold and
to sell at the end of every period after some
date in the future whatever amount is required to
satisfy the demands of depletion users at the
price that would have prevailed in that period if
all government gold had been sold in the given
period. If government uses of gold require
ownership but not storage, any loss in welfare
from government uses resulting from making
government gold available for private uses would
be much smaller under the policy involving
lending and gradual sales in the future. (quot;Can
Government Gold Be Put to Better Use?quot; p. 2.
Board of Governors, Federal Reserve System, June,
1997. International Finance Discussion Papers
#582. The italics are in the original document.)

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Why would a government want ownership, but not
storage? They did not explain. They did not have to. By
retaining legal ownership, governments and central banks
are not required to report the physical depletion of their
gold reserves. Elected politicians are unaware of the
physical transfer of their nations' gold into the private
sector -- such as India -- and would-be speculators who are
ready to buy gold as an inflation hedge remain fearful that
the central banks will sell all of that gold, forcing down
gold's price.


In a pair of newsletter reports last year [2001],
James turk has followed certain shifts in definition by the
U.S. Treasury and the Federal Reserve System regarding U.S.
gold reserves. The old term used to be quot;gold stock.quot; The
portion of the gold stock at West Point was re-named
quot;custodial goldquot; in September, 2000. In June, 2001, this
gold was re-named again: quot;deep storage gold.quot; Turk
presents a detailed report on the decline of SDR [Special
Drawing Rights] Certificates in the Exchange Stabilization
Fund, a fund used by the United States to stabilize the
exchange value of the dollar. The decline was from 9.2
billion (Dec. 1998) to 2.2 billion (Dec. 2000).
(Freemarket Gold amp; Money Report, July 23 and August 13
issues. The SDR is defined in terms of
gold: 35 SDR's = one ounce of gold. So, 9.2 billion =
262.9 million ounces. There are now 2.2 billion SDR
Certificates remaining in the ESF, or 62.9 million ounces.
The difference is 200 million ounces.

A summary is available on-line, posted by the Gold
Anti-Trust Action Committee. It shows the decline in the
SDR Certificates. I offer extracts from the full report,
which you should read in its entirely.

quot;Everything is fitting into place,quot; [GATA's Bill]
Murphy says. quot;It appears that the SDR
certificates are being used by the ESF to hide
its gold transactions from the American public.quot;

GATA has long claimed that central bank gold
loans are two to three times the commonly
accepted 5,000 tonnes cited by the gold industry.
quot;Eighty-seven percent of the U.S. gold reserves
is very close to 7,000 tonnes, which would
increase to 12,000 tonnes the official sector
gold out on loan in some way,quot; Murphy notes.

quot;No wonder former Treasury Secretaries Robert
Rubin and Lawrence Summers and current Secretary
Paul O'Neill have refused to directly answer
members of Congress regarding their gold market
queries,quot; Murphy goes on. quot;The ESF reports only
to the president of the United States and the
treasury secretary, which means that these men
are very aware of the mechanics of manipulating
the gold price.quot; . . . .

Then in an August 7, 2001, letter, John P
Mitchell, deputy director of the U.S. Mint,
offers no explanation why 1,700 tonnes of U.S.
Gold Reserves stored at West Point, N.Y., were
reclassified in September 2000 from quot;Gold Bullion
Reservequot; to quot;Custodial Gold.quot; In May this year
all 7,700 tonnes of the U.S. gold reserves in
Treasury Department depositories were
reclassified as quot;Deep Storage Gold.quot;

Mitchell says the U.S. Gold Reserve was quot;not
reclassified -- it was renamed to better conform
to our audited financial statements.quot;

quot;But Mitchell offers no explanation why that
change is being made now. Could it be that these
changes to conform to accounting principles were
necessary because of the dramatic reduction in
SDR Certificates and encumbering of the U.S. Gold
Reserve?quot; Murphy asked.

quot;This is most frightening,quot; Murphy says. The U.S.
Government defaulted on its gold obligations in
1933 and 1971. Could it be happening all over

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I asked Turk a series of questions by e-mail. His
replies are quite revealing. My questions related to the
means by which the leasing operations have taken place.

North: That the U.S. may be making available
gold to the Bundesbank is conceivable, but to
what purpose?

Turk: The ESF needs gold in Europe for lending to
bullion banks. There is no bullion lending in
the States. So the ESF lends the Bundesbank gold
which is stored in Frankfurt, Zurich, London etc.
In return, the Bundesbank gets the US gold in
West Point.

North: Is the bulk of gold leasing conducted through
the Bundesbank?

Turk: The ESF lends the gold to JP Morgan Chase,
Citibank and Deutschebank of course.

North: The price of gold can only be forced down
by the sale or lease of gold, or the threat of a
sale. There has to be an outlet into the private
market. Is there any monitoring of such

Turk: Yes, Frank Veneroso is one of the leading
gold analysts with great central bank
connections. He believes that upwards toward
15,000 tonnes has been loaned by central banks,
much more than the estimates by Gold Fields
Mineral Services. The reason is that GFMS, as I
understand it from Veneroso, largely ignores the
borrowing by commercial banks to fund their own
portfolios, i.e., the so-called carry-trade.
GFMS only looks at hedging.

My guess is that it is being leased, so that
there is no evidence of reduced central bank
inventories. Still, someone has to be selling
gold into the market if downward price pressure
is to be maintained. Why wouldn't this huge
increase in purchases be visible to the public?

According to Veneroso's statistics, it is. Last
year demand was 1500 tonnes greater than supply.

North: If the IMF is doing it, then what role
does the Bundesbank play?

Turk: Pawn, for the US banking interests, which
they manipulate through the IMF.

It gets even more interesting. In his July 23 report,
he wrote: quot;The US Reserve Assets report now excludes all
reference to the ESF, and previous reports already
published have been changed. Not only were the figures
adjusted, but all references to the ESF have been
eliminated.quot; This policy began in February, 2001. Turk
had blown the whistle in his December, 2000 report. quot;I
guess the January 2001 report was already being prepared
when my December article appeared, so it was too late to
change that report.quot; Here is the famous bottom line: quot;The
ESF has been erased out of the US Reserve Assets report as
if it had never previously existed.quot; The ESF was created
in 1934, the year that Roosevelt raised by 75% the price of
the gold that the government had confiscated from Americans
in 1933.


GATA has now revealed evidence that the IMF is doing
exactly what that 1997 Fed report recommended. The IMF has
unofficially changed the rules. It now allows central
banks to keep leased-out gold on their books as actual

In October 1999 the IMF held a meeting for its
member countries in Santiago, Chile, only a
couple of weeks after a lightening $84 run-up in
the price of gold. GATA's Mike Bolser found the
IMF manual distributed to the attendees, which
explains how member central banks are to account
for something called gold swaps -- gold that
leaves the vaults of the central banks. In
effect, Bolser came across the IMF's gold quot;play

As you will learn shortly, it appears the gold
swap issue is at the heart of the manipulation of
the gold price.

Bolser's discovery led GATA's Andrew Hepburn to
query the IMF with the following:

Why does the IMF insist that members record
swapped gold as an asset when a legal change in
ownership has occurred?

The IMF answered:

quot;This is not correct: the IMF in fact
recommends that swapped gold be
excluded from reserve assets. (see Data
Template on International Reserves and
Foreign Currency Liquidity, Operational
Guidelines, para. 72,quot;

Over the years the GATA camp has received nothing
but denials from the U.S. Treasury, Alan
Greenspan, BIS, bullion banks and the IMF. In
essence, their responses have been well-couched,
disingenuous and difficult to disprove. THIS
response was NOT because of the sleuthing of
Canada's Hepburn. Their constant lying finally
caught up with them. The central bank of the
Philippines responded to Hepburn as follows:

quot;Beginning January 2000, in compliance
with the requirements of the IMF's
reserves and foreign currency liquidity
template under the Special Data
Dissemination Standard (SDDS), gold
swaps undertaken by the BSP with
non-central banks shall be treated as
collateralized loan. Thus, gold under
the swap arrangement remains to be part
of reserves and a liability is deemed
incurred corresponding to the proceeds
of the swap.quot;

In other words, the IMF instructed the central
banks that even though the gold was gone, it
should still be counted as part of their
reserves. The central banks of Portugal, Finland
and the ECB itself all confirmed the Philippine's
response to Hepburn.

The GATA camp caught the IMF flagrantly deceiving
the public. Since then, the IMF has refused to
answer all follow-up questions from GATA

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Central banks seem to have been secretly dumping gold
into the market in order to depress its price. All of this
is guesswork based on obscure statistics and a change in
the IMF's reporting rules. But it would explain the
failure of gold to hold above $300. I think GATA's
analysis makes sense.

If this analysis is true, then we are seeing the
greatest irony in the history of fractional reserve
banking. Always before, the banks had taken in gold from
the public, issuing IOU's to gold in exchange. Then the
banks have loaned out IOU's to gold that they did not have
in reserve. They drew interest on the loaned IOU's to
gold. Then the banks defaulted, keeping the public's gold,
refusing to redeem gold on demand. The governments of the
world accepted this lawless transfer of gold officially to
them, the governments.


Today, we know that central banks have lent some of
their nations' gold bullion to bullion banks for an
interest payment of 1.3% per annum: the gold-lease rate.
That was in 2002. These days, the rate is about 0.37% per
year. This is posted on

a href=http://www.thebulliondesk.com

Look to the right of quot;Top Reports.quot; You will see buttons:
quot;PGMs,quot; quot;Charts (near),quot; etc. The eighth button is
quot;Leases.quot; Click it.

The bullion banks sell the borrowed gold into the
private markets, receive money for it, and invest the money
at the market rate of interest, which is above .37%. The
bullion banks have told the central banks, quot;we'll repay,
someday.quot; The question of questions now is this: Can they
ever repay? The gold is long gone. It's in some Indian
bride's dowry.

The European central banks stole gold from the public
in 1914 by revoking gold redeemability when World War I
broke out. Now these banks have lent this gold to bullion
banks for 1% per annum. Bullion banks have transferred
ownership of this gold back to the public, paying 1% to the
central banks for the privilege, plus a promise of
repayment Real Soon Now. So, the masters of fractional
reserves, central bankers, have been conned by the public's
economic agents: the bullion bankers, who got the central
banks to turn over the gold. The bullion banks have now
issued IOU's to the central banks. They are quot;borrowed
shortquot;: and quot;lent long.quot; In short, the bullion banks have
done to the central banks what the commercial banks and
central banks did to the public in 1914.

We the people have now got most of our gold back, and
we don't even know it yet.

The exception seems to by the Federal reserve. It
looks as though the FED has not leased its gold. But
Turk's figures indicate that the FED may have swapped its
gold for the Bundesbank's gold, and then the Bundesbank
sold off 86% of the FED's gold. This means that the gold
in storage at West Point -- quot;custodial goldquot; -- is exactly
what the phrase indicates: we are keeping this gold for the

The privately owned bullion banks are short: they have
promised to return the central banks' gold at some future
date. The major gold mines are also short: they have
promised to repay gold out of production at some future
date. In a January 23, 2002, report by John Hathaway, quot;The
Investment Case for Gold,quot; the author observes:

Forward selling or hedging by gold companies to
quot;lock inquot; margins is the antecedent of business
practices adopted by Enron and other entities
that prefer counter party to market risk. The
architects of the gold industry's lamentable
dalliance with derivatives will engineer grief
well beyond the gold sector. Financial market
exposure to interest rate and foreign exchange
derivatives dwarfs the notional value of gold and
commodity contracts. Gold derivative traders
have laden the books of their host institutions
with the financial equivalent of toxic waste
dumps. The intellectual basis for the existing
gold derivative books, representing at least 5000
tonnes, or two year's mine production, was a
bearish view of gold and a uniformly bullish view
of the dollar.

What happens to the price of gold when gold investors
finally realize that the overhang of central bank gold is
not there?

They may not recognize this for several years. But,
at some point -- I believe within the next three years --
the central banks will cease selling gold every time its
price rises above $300. [This turned out to be true -- so
far (Canada excepted, which is almost out of gold) -- last
year, when I was writing this report.] Their actual
physical reserves are too depleted. If investors perceive
that this is the central banks' new policy, gold will jump
way above $300. At that point, the bullion banks, which
are short, will be caught in a monumental squeeze. They
will not be able to cover by buying gold futures, because
the physical gold is not available for delivery. This will
leave them exposed to bankruptcy, and it will leave shorts
on the futures market trapped.

What would happen on the gold futures market when
everyone knows that there is not enough gold for delivery?
Lock limit up. Lock limit up. Lock limit up. The gold
futures market will not be where the gold shorts will want
to be. Or anywhere else, for that matter.

If China starts selling dollars and taking delivery of
gold, then there will be a crisis in the gold futures
markets on the scale of January, 1980. This policy would
be consistent with China's goal to become the dominant
economic nation in Asia, replacing Japan.


If price deflation really is coming, despite monetary
inflation, gold could fall. But I think today's monetary
inflation will secure the U.S. economy against a price-
deflationary scenario.

The other major negative factor, another series of
unexpected gold sales by central banks, is increasingly
unlikely. They are running out of gold, despite the
official statistics on their unchanging official reserves.
They can sell gold reserves again, but at some point, the
game must end. We are closer to the end than five years
ago, when the gold-leasing strategy was adopted.