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Accounting for the ESF's Gold Swaps - James Turk

Section: Essays

A few weeks ago I received an interesting email from Andrew Hepburn. He is a diligent researcher who has done yeoman's work for, an organization formed for one purpose - to find the truth about who is keeping a lid on the gold price. Andrew and I recently have been sharing information and research on a number of matters, and he brought to my attention an intriguing footnote in a 1997 report called the "Consolidated Financial Statements of the US Government" (CFS).

The federal government completes the CFS annually. The CFS started being prepared, as I recall, about fifteen years ago in an attempt to measure what the US government's true financial picture looked like according to Generally Accepted Accounting Principles. As readers may know, the US government does not use GAAP in its accounting. Therefore, Congress asked the General Accounting Office (GAO) to begin preparing an annual CFS that would provide accurate GAAP reporting of the US government's financial accounts. These reports were to be prepared and dated as of September 30th, which is the government's fiscal year-end.

I hadn't looked at the CFS for a number of years because they were not very detailed, and also because they included some major errors in accounting. For example, the CFS booked the US Gold Stock as an asset at its market value, but only recorded the corresponding liability for US Treasury Gold Certificates at $42.22 per ounce. This difference of course overstated the government's true net worth, or I should say, net deficit. For the fact is that according to GAAP, the US government has a negative net worth - negative $5.0 trillion in 1997 and negative $5.9 trillion in 2000. So this misreporting of the gold stock seemed to be a clear attempt to minimize this deficit net worth in order to make the government's financial picture look better than it really was. As a consequence, I never paid much attention to the CFS until Andrew brought footnote #2 of the 1997 CFS to my attention. It reported an accounting change, and it was one that I found interesting.

In 1997 the CFS began valuing the US Gold Reserve at $42.22 instead of market value, which I think is a significant change for two reasons.

1) This change reduced the US government's net worth by the difference between the market value of the asset and the government's liability, i.e., the US Treasury Gold Certificates. Given that the US government has a multi-trillion dollar NEGATIVE net worth, there must be a very good reason for them to make that negative net worth even bigger in the CFS. This good reason is the second point.

2) This accounting change - made presumably because of GAAP rules - gives substance to the argument that as of September 30, 1997, the US Treasury owed 261.7 million ounces of gold to the Federal Reserve, and not 11 billion dollars. In other words, this accounting change made clear that the Treasury owes the entire US Gold Stock to the Federal Reserve.
This meaningful change in the quest for accurate accounting by the GAO really spurred my interest. The Federal Financial Management Act of 1994 apparently was having a positive impact on the accuracy of the CFS reports. So I thereupon began reading the CFS for recent years, and particularly the footnotes. One can learn a lot by reading the footnotes to financial statements, comparing them from one year to the next and then studying any changes. And there were indeed several interesting changes.

1) Beginning in 1997, the following statement was added to footnote #2: "Gold has been pledged as collateral for gold certificates issued to the Federal Reserve banks totaling $11.0 billion." As explained above, this change is a significant advancement, and points to the more accurate reporting being required by the GAO.

2) One other improvement for accuracy was made in 1997. The CFS began some basic reporting on the Exchange Stabilization Fund (ESF), by recording some of its liabilities. The report said that the "Exchange Stabilization Fund includes SDR certificates issued to the Federal Reserve banks and allocations from the International Monetary Fund." That liability was $15.9 billion in 1997.

3) These weren't the only changes. The CFS more than doubled in length from 32 pages in 1995 to 68 pages by 1997, then jumping to 94 pages in 1998, 111 pages in 1999 and 142 pages in 2000.

4) Curious changes weren't happening just to the CFS. Spurred by what I was learning from the CFS, I began looking at the annual reports of the Federal Reserve. The 1998 annual report included a new footnote in a section entitled "Significant Accounting Policies" that states: "The Secretary of the Treasury is authorized to issue gold certificates to the Reserve Banks to monetize gold held by the U.S. Treasury. Payment for the gold certificates by the Reserve Banks is made by crediting equivalent amounts in dollars into the account established for the U.S. Treasury. These gold certificates held by the Reserve Banks are required to be backed by the gold of the U.S. Treasury. The U.S. Treasury may reacquire the gold certificates at any time, and the Reserve Banks must deliver them to the U.S. Treasury."

By 1998 the intervention in the gold market was progressing to such an extent, it is not unreasonable to conclude that the Federal Reserve had become concerned about the eventual ramifications of these interventions and the Fed's involvement in it. This view acquires extra weight when considering that it was in 1998 when Alan Greenspan testified before Congress that "...central banks stand ready to lease [i.e., lend] gold in increasing quantities should the price rise." Was the Fed trying to build some safety net around itself so that it can reasonably blame the Treasury for all the gold market intervention in some future Congressional investigation? This conclusion is not unreasonable given the following change to the CFS.

5) In 1999 footnote #2 on the CFS said: "Gold was pledged as collateral for gold certificates issued to the FRBs totaling $11.0 billion." Beginning in 2000, this disclosure was changed to read: "Gold totaling $11.0 billion was pledged as collateral for gold certificates issued and authorized to the FRBs by the Secretary of the Treasury. Treasury may redeem the gold certificates at any time." Why was the first sentence changed and the new statement added? Was the GAO asking Treasury some tough questions about Treasury's authority to deal in gold and intervene in the gold market? Did Treasury feel that because of its growing involvement in the gold market some statement on its authority was necessary for the sake of open and honest disclosure?

In this regard, I would like to confirm a point about the government's authority to dispose of the US Gold Reserve. I had thought that Congressional approval was required, but I was wrong. Dave Walker set me straight on that one.

Dave's name may be familiar to you. I've mentioned him before in these letters. Dave is another diligent researcher who has done some wonderful work for Here's how Dave set me right on this matter. He went straight to the law.

Though it had been my understanding that Congressional approval is required to sell gold, I've never researched this point. I believe I probably first read it in the media years ago, and then just accepted as fact that Congress must approve any transactions involving the US Gold Reserve. I was wrong, and Dave proved it to me by showing me the US Code. I had to read the code myself to believe what he was telling me, so flabbergasted was I that Congressional approval was NOT required. But there it was in Title 31, Section 5116.

The law doesn't say anything about any Congressional authority. Personally, I really find this hard to believe that the President/Treasury Secretary can dispose of the US Gold Reserve without Congressional approval, but I've seen so much now I keep asking myself why I should be surprised by yet another revelation. Same goes for Title 12 Section 354 regarding the Federal Reserve and its authority "to contract for loans of gold".

Then Andrew Hepburn found the following in the Treasury's Budget for FY 2002: "The Secretary of the Treasury is authorized to deal in gold and foreign exchange and other instruments of credit and securities as deemed necessary, consistent with U.S. obligations in the International Monetary Fund (IMF), regarding orderly exchange arrangements and a stable system of exchange rates. An Exchange Stabilization Fund, with a capital of $200 million, is authorized by law for this purpose (31 U.S.C. 5302)."

Thus, regardless what you may have previously thought, Congress does not need to approve any US gold sale, nor anything else concerning the US Gold Reserve, including the "gold swaps" that we know were made because their appearance in the minutes of the FOMC's January 1995 meeting was inadvertently not redacted.

Given what we have already seen, it is not too surprising that the footnotes to the CFS and the annual report of the Federal Reserve have been beefing up their disclosure about Treasury authority, as Treasury/ESF activity in the gold market increases. And in this regard, I came across the following very important change.

6) To define International Monetary Assets (IMA), the 1999 CFS states in footnote #2: "Assets valued on a basis other than the U.S. dollar comprise 'International monetary assets' ". This footnote then goes on to list and explain each of those assets - (1) the U.S. reserve position in the International Monetary Fund (IMF), (2) Special Drawing Rights (SDRs), (3) foreign currency and (4) other monetary assets denominated in foreign currency. There is no mention of gold, nor should there be because gold is reported separately in the table accompanying footnote #2. But compare this definition of IMA to the one used in the 2000 CFS.

Footnote #2 states: "'International monetary assets' include the U.S. reserve position in the International Monetary Fund (IMF), U.S. holdings of Special Drawing Rights (SDRs), official reserves of foreign currency, and gold." And "gold"? Why is gold now being included in this definition?

On the surface, including gold in this definition does not make sense because it is reported separately in footnote #2 as $11 billion in both 1999 and 2000. But if your intent is to hide a 'gold liability', then everything falls into place. The above assets are being reported 'net' of offsetting liabilities.

As proof that the IMA are reported above on a 'net' basis - i.e., net of liabilities - consider the following evidence. The 2000 CFS reports the IMA as $35.2 billion and states: "The U.S. reserve position in the IMF has a U.S. dollar equivalent of $13.7 billion as of that date." It goes on to say that: "SDR holdings are an asset of Treasury's Exchange Stabilization Fund (ESF), which held SDRs totaling $10.3 billion equivalent at the end of fiscal 2000."
The CFS does not state the foreign currency holdings, but we can calculate what they are by subtracting the $13.7 billion IMF position and $10.3 billion SDR position from total IMA of $35.2 billion, which equals foreign currency holdings of $11.2 billion. Then compare this total from the 2000 CFS to the US Reserve Assets reported in the Dec 2000 Treasury Bulletin. This comparison is presented below:

International Monetary Assets as of 30 Sep 2000

Name of Treasury Report





in IMF

Dec 2000 Bulletin ($'s millions)






2000 CFS ($'s billions)






We can see from the above table that the Gold Stock, SDRs and Position in the IMF are the same for both reports, allowing only for the different levels of precision by which they are reported. But note that the foreign currency assets are $31.2 billion according to the report of US Reserve Assets in the Treasury Bulletin, but are only $11.2 billion on the CFS. The reason for this difference is clear.

The US Reserve Assets are reported in the Treasury Bulletin on a gross basis. But the CFS is prepared using GAAP, and therefore these assets must be reported 'net' of any offsetting liabilities (for example, just like account receivables are reported in GAAP on a 'net' basis).

Therefore, the comparison of these two reports on a gross and net basis shows that the US government has a $20 billion liability, but not just for foreign currency. There is a liability for gold as well because footnote #2 says so. As noted above, it defined IMA to "include the U.S. reserve position in the International Monetary Fund (IMF), U.S. holdings of Special Drawing Rights (SDRs), official reserves of foreign currency, AND gold." [emphasis added] The word gold was added in there in 2000 for a reason, and that reason is to record the US government's gold liability - it owes gold. But to whom?

Last April in "Behind Closed Doors", I presented evidence that the US government had swapped with the Bundesbank some 1,700 tonnes of gold stored at the depository in West Point. At the time, I wasn't able to figure out where the transaction was hidden in the US governments accounts, but I now have the answer. This 1700 tonnes at $280 per ounce is a $15.3 billion transaction. This accounting entry is in the $20 billion liability explained above, which at $280 per ounce allows for the possibility that the size of the gold swap has increased to $20 billion. I say 'possible' because the rest of this liability may have arisen from a currency swap.

So here's the accounting. The US government swaps gold with the Bundesbank, which now owns the gold in West Point. Further, to secure this transaction, the Bundesbank receives SDR Certificates, which solves "The Mystery of the Disappearing SDR Certificates" (Letter No. 289, August 13th, 2001). The ESF gets the gold in the Bundesbank's vault, which it then lends to the bullion banks in an off-balance sheet transaction.

Since I first reported that the Bundesbank owns the gold in the Treasury vault at West Point, I have been asked countless times, how can the gold still be reported as being held in the Treasury vaults and listed as a US Reserve Asset if it is really owned by the Bundesbank? Well, according to GAAP accounting it can't. And that is what I have now discovered in the 2000 CFS, which presents the offsetting gold liability in the IMA.

This 2000 CFS footnote was changed from the 1999 CFS for a reason - to reflect new conditions in the accounts. As further confirmation of this point, we already know that on September 30, 2000 in its reports of the US Gold Reserve, the Treasury began labeling the gold in West Point as "Custodial Gold", changing it from its previous classification of "Bullion Reserve". This gold is being held in custody for the Bundesbank, its owner.

It is worth recalling that all of these changes took place in the fiscal year ending September 30, 2000. That year began October 1st, 1999, just days after the Washington Agreement. There has been a lot of evidence presented that the Bank of England and other central banks intervened heavily in the gold market to cap the rally then underway to get the gold price back below $300 per ounce. See for example, Paragraph 55 of Reg Howe's Complaint against the Bank for International Settlements et al., at

Finally, there is one last point to consider. Why didn't the GAO require this gold liability to be offset directly against the US Gold Reserve, instead of the foreign currency holdings?

Clearly, that accounting would have laid bare for all to see that the West Point gold has been swapped, so that is one reason why the Treasury/ESF didn't report it that way. But I actually think GAAP standards are being met by the way the accounting was handled. First, possession is 9/10ths of the law. The gold is still in Treasury vaults, so what is the Bundesbank going to do to get its gold back if the Treasury refuses to release it? Send in the German army? Besides, the Bundesbank got the SDR Certificates as security, so one could reasonably argue that the Bundesbank could be made whole by replacing on its balance sheet the gold it formerly owned with the SDR Certificates it now owns. Of course, I would have never accepted paper as equivalent value in exchange for gold, but then, I'm not a central banker.

In summary, there is still some room for more interpretations about the precise accounting, but I think we have taken one more giant step forward by providing this evidence to account for the gold swap. We have explained how the ESF has been surreptitiously intervening in the gold market. We know where they get the metal that they need. We now also know how they account for it. And we know their motive - to keep the illusion that the dollar is worthy of being the world's 'reserve currency'. And all of this ESF gold-related activity has been occurring without Congressional approval, which as noted, is not needed.

Over the past few years I have presented in these letters strong evidence that the gold price is abnormally low because of government manipulation. The evidence is compelling, but not everyone has yet been convinced. Two reasons most often emerge to explain their skepticism.

They note the absence of any Congressional approval putting the US Gold Reserve into play. We now know that Congress has no control over the gold reserve, and their approval is not needed.

The other reason for their skepticism relates to reporting. How can the US government report the ownership of gold assets in West Point that are really owned by the Bundesbank? The answer is simple - only if the US government owes the gold. The CFS reports the offsetting gold liability, so the US government holds the gold asset in custody for its real owner, the Bundesbank, which explains why the West Point reserve was changed to Custodial Gold - the US government doesn't own it.

Hopefully this report will convince the remaining skeptics. And hopefully, this report will spur Congress to investigate what is happening to America's gold.

This report shines more light on the ESF and the gold shorts. The circle is tightening around them. The pressure is building. One of these days, they will lose control, sending the gold price soaring. And I think that moment is getting very close.

Copyright 2002 © by The Freemarket Gold & Money Report.