"No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law; and a regular Statement and Account of the Receipts and Expenditures of all public money shall be published from time to time."
United States Constitution, Article One, Section Nine, Paragraph Seven.
In 1933 President Roosevelt and in 1971 President Nixon defaulted on US gold payment obligations in order to preserve some of its rapidly disappearing gold reserves. However, apparently President Nixon had more in mind than stopping the loss of gold from the US Treasury. On or about Oct. 3, 1969 the IMF began its first SDR pre-allocation period. This period appears to have begun as a replacement for the collapsed London Gold Pool price fixing of $35.00 an ounce. The collapse freed the gold price to rise to about $45 an ounce. During this period the IMF members manipulated the gold price back to the IMF assigned value of $35.00. In fact, the members actually forced the gold price to 20% below the US gold window price, possibly causing a carry trade. However, French demands of payment in gold forced Nixon to close the gold window and remove the U.S. from the gold standard for good. Significantly, the amount of the SDR allocation at the agreed price roughly equaled the total metric tonnage in the US gold reserve, apparently so as to allow the SDR to serve as a place holder for sold gold. The actual allocation began on Jan. 1, 1970. Throughout the period of the allocation, the price rose gradually until it was completed during January, 1972 with the price about $42 per ounce. At this time the US apparently marked to market its remaining reserves by fixing the official price at $42.222 per ounce, where it stands now. The IMF member pegging operations were then stopped, and the price of gold was allowed to be set by the market. Within a year it had risen to around $65 an ounce, and in two years to around $105 an ounce.
During the second SDR allocation period, no gold price pegging operations appear to have been conducted, and the price was allowed to rise to around $416 an ounce in March, 1996. At that point, price pegging operations seemed to resume in preparation for the third SDR allocation, which has not yet met final approval, pending a US favorable vote. The targeted price of $280 an ounce was apparently achieved, and was maintained until the October, 1999 Washington Agreement, which seems to have caused things to have come unglued due to a rapid run-up of the gold price to over $300 an ounce. The Washington Agreement set a maximum of gold sales and loans the signatories can authorize. The US and UK were not parties to this agreement, nor were they even consulted. The announcement of the limitation of gold sales and loans impacted the US ability to gradually dishoard its reserves by clandestine gold swaps by forcing it to sell large amounts of its gold reserves all at once, in an emergency arrangement with the Bank of England, and possibly, the Bundesbank (see below). This emergency is evidenced by a statement of Edward A. J. George, Governor of the Bank of England, and a director of the Bank of International Settlements (BIS) that:
We looked into the abyss if the gold price rose further. A further rise would have taken down one or several trading houses, which might have taken down all the rest in their wake. Therefore, at any price, at any cost, the central banks had to quell the gold price, manage it. It was very difficult to get the gold price under control but we have now succeeded. The U.S. Fed was very active in getting the gold price down. So was the U.K. (Emphasis added)
Just what a gold swap might be is discussed next. Much of the foregoing information was discovered by the excellent work of David Walker, and his discussion and supporting evidence are now available on the Gold Eagle Web site.
Recent discoveries by analysts James Turk and Ed Bugos show that much of US' gold has been swapped or transferred to foreign sources via the Treasury's Exchange Stabilization Fund's (ESF) SDR (Special Drawing Right) Certificates (especially in the 18 months after the European Union's Washington Agreement to limit gold sales): thus reducing the finite number of SDR Certificates from 9.2 billion to about 2.2 billion as of December, 2000. These transferred SDR Certificates, which by law can never exceed the number of SDRs they are issued against, represent the 1700 tonnes of the US Gold Reserve held as "Custodial Gold" (since changed to "Deep Storage Gold") in the West Point Mint which was swapped to the Bundesbank for equivalent gold in its vaults, and secured by these missing SDR Certificates. The gold in Germany was then leased by the US to bullion banks in quantities as needed to suppress the gold price, thus resulting in the sale of some 21% of the official US gold reserves. This sale is clearly reflected in the "Consolidated Financial Statements of the US Government (CFS), as a mixed $20 billion currency and gold transaction, but wherein the gold portions and currency portions are unspecified. This complies with Generally Accepted Accounting Principles (GAAP) in general, but conceals the amount of gold sold. However, this sale of US gold is NOT reflected in the Treasury Bulletin of December 2000, and is NOT reduced from the official Gold Stock in either the Bulletin or the CFS. Why would the sold gold not be reflected in the Gold Stock figure - to conceal the sale, and to comply with new IMF regulations applicable to this fiscal year (beg. 9/99).
In October 1999 the IMF required all participating
countries to change their accounting for gold swaps (loans of assets
where the ultimate recipient sells the offsetting gold into the market)
starting in January 2000, so that the resulting revenues from the swap to
a non central bank (bullion bank) had to be deducted from the country's
Gross International Reserves. However, the gold itself was to be accounted
for as still being part of its Net International Reserves. This rule
change fully explains why the ESF's Gold Stock and SDR reserves continue
largely unchanged, while the SDR Certificates issued against them declined
to 2.2 billion from 9.2 billion (as in the case of the aforementioned
sale). It also shows that the decline in SDR Certificates alone, could
only have come from gold swaps because currency transactions reduce both
SDRs and SDR Certificates by like amounts. In other words, what you have
in a gold swap to non-central banks is a situation like a used car dealer
who had nine cars, sold seven, and reduced his inventory valuation to two
cars, and yet advertises to the world he has nine cars for sale because
you can still count the seven new cardboard cars on his lot. This is plain
old accounting fraud by keeping two sets of books: one for the public and
another for the CFS. Actually it's what in Russian would be called a
"maskirovka", and is reminiscent of the collapsible Potemkin Villages set
up so Catherine the Great would not have to see the wretched living
conditions of her subjects as she traveled around her empire. Perhaps they
serve a similar function for the Treasury, so they don't have to see the
35% of black South Africans mineworkers who are dying of AIDS because they
cannot earn enough to pay for medications from the low wages paid by the
nearly bankrupt South African gold mines. Ah, well! As Joseph Stalin once
said, "If you want to make an omelet, you have to break eggs!".
(Interestingly, GATA has actually caught the IMF in a bold-faced lie about
this policy. For those who have some accounting knowledge, the
misrepresentation of the IMF policy in response to a GATA question on swaps is at http://dsbb.imf.org/guide.htm,
Operational Guidelines, paragraph 72. (claimed gold swaps must be deducted
from reserves), and the true policy at
http://www.imf.org/external/pubs/ft/bop/2000/0013.pdf, page 32, item 3,
(i), and also at
http://www.bsp.gov.ph/statistics/sefi/fx-int.htm (gold swaps should
not be deducted from reserves). In addition,
GATA has obtained independent confirmation that this is the IMF's gold
swap policy from the staffs of the central banks of Canada, Ecuador,
Finland, Holland, and Portugal (who now publishes that MOST of its gold
reserves are sold, loaned or swapped), and in writing, from Portugal,
Finland, Italy and the ECB. Further, Andrew Hepburn of Canada, a GATA researcher, has learned that the
Washington Agreement does not limit gold swaps, as had been thought. In
fact, he has now shown that the Bank of Italy has gold swaps with ECB
members, and with non ECB members; that its reserves are accounted for in
the IMF fashion, wherein they are treated as collateralized loans, despite
the fact that the gold has left their vault or is ear-marked for another
non ECB owner: most likely, a bullion bank. What this means for the Euro
is that the purported gold "backing" of the Euro by the ECB is illusory.
This is because the member countries own the gold, and not the ECB, and
that the member countries have exchanged significant portions of their
gold for "paper gold". It is even possible that most or ALL of the members
of the G10 now actually own little or no physical gold. To see Andrew
Hepburn's discovery, please visit
www.bancaditalia.it, Click English | Publications | Supplements to the
Statistical Bulletin | Money and credit aggregates of Euro area: Gold and
Gold Receivables.
As a matter of related interest, the owners of the 12 US Federal Reserve
Banks are:
Rothschild Bank of London, Rothschild Bank of Berlin, Lazaro Brothers of Paris, Israel Moses Seif Banks of Italy, Warburg Bank of Amsterdam, Warburg Bank of Hamburg, Lehman Brothers of New York, Kuhn Loeb Bank of New York, Goldman, Sachs of New York, and Chase Manhattan Bank of New York,
Welcome to the Gold Cartel, the replacement for Lyndon Johnson's ending of the London Gold Pool in 1968. Since IMF members are prohibited from making their currencies redeemable in gold, they apparently have substituted secret manipulation of the gold market as a means of hiding the inherent instability of their paper money: regardless of whatever damage it may do to small investors and gold miners. As an example of how the the various central banks set up syndicates via credit facilities to lease the gold to the bullion banks, which, in turn, sell it short and invest in interest rate derivatives, or else lease to a gold miner for them to sell forward against future production, please examine this example of a syndication of a gold credit facility created by the South African Reserve Bank on June 28, 2000.
So what does all this mean in terms of the present gold market? In a free market there is a strong inverse relationship between the gold price and the real interest rate. The US economy is now experiencing negative real rates. In a free market the gold price would be rising significantly. However, the market is not free, and the rising gold price, responding to the negative rates, is being suppressed by European gold sales, and leasing in Europe and the US. This is because the third allocation of IMF paper gold SDRs will be implemented when the US casts its vote in favor. This will result in some additional 3000 metric tonnes being placed gradually on the market to stabilize the price. Since the primary means of covert gold price manipulation is leasing to bullion banks, and the publicly announced sales, a mere facade, the bullion banks must have a stabilized gold price or face collapse of their gold leasing derivatives. Heavily hedged gold miners will also be placed at risk. When the US finishes unloading its share of its gold reserves to make space for the new IMF SDR allocation, it will vote in favor of the third allocation, and the allocation will be implemented. As was seen above, GATA has discovered and proved that the IMF has been lying about its member's gold reserves. Now it has found out that they are doing so to hide the substitution of new IMF paper gold to replace the members' physical gold reserves, which have been sold into the market in coordinated increments to stabilize the price, primarily by Goldman Sachs and JP Morgan Chase. In view of this process, the gold price will not be allowed to rise until the required physical reserves have been sold off and replaced by the new SDRs. In the past this process has required about two years, and has depressed the gold price prior to and during the implementation period. Barring a double digit run up of US inflation, or a huge, unanticipated catastrophe, such as the the Enron failure or a major bank collapse, the gold price will not be allowed to rise significantly until this process is completed. On the positive side, in the past, when these implementations have been completed, the gold market was freed, and the price of gold rose significantly and permanently. But for now, volatility will be suppressed to avoid collapse of some 150 trillion dollars of notional value in derivatives. This process is what we have been witnessing in the stock, bond and gold markets these past five or six years (such as the ending of the long bond to hide inflation from investors, which might undo it all).
Given that the price must be stabilized until some time in the future to allow the bullion banks (like BIS, Citibank, Deutsche Bank and JP Morgan Chase), and the miners (like Barrick and Placer Dome) to unwind their hedges, one should not anticipate a large rise in the gold price. The central banks can be expected to do everything in their power to undermine the confidence of long gold investors until these matters are completed. If they successfully complete this process, gold investors can expect to realize large profits on their long term holdings in the out years. Traders will be able to profit from the frequent dips and rises caused by the confidence and market suppression mechanisms, so the gold market will remain active. Presumably, when the allocation process is complete, the US will mark to market any gold reserves that are left: to be fixed at the rate of that time, as was done during the first SDR allocation. All of this could very well come undone by a complete collapse to depression levels of the bubble stock market, which was the inevitable byproduct of the strong-dollar/false-gold-price manipulation. Apparently the bubble and damaged gold investors (more broken eggs) were deemed a necessary cost of the third allocation plan; however, what goes around, comes around. There is also the possibility that the Howe vs. BIS, et al. lawsuit and is successor, the Blanchard and Co lawsuit, could unravel the maskirovka by exposing it in the discovery phase, but even that might not affect it, given the propaganda of the Western press. Nor should one expect analysts and arbitragers to expose the game if they know of it, since they can ill afford to have their reputations tarnished by their irrelevance, and their profits diminished by investors discouraged by the artificial churning of the of the gold market.
Please note, however, that India and several other members of the IMF are not following this protocol, and do not intend to sell off their reserves, and are not creating room for the new SDRs. They apparently are going to continue to use gold and currencies for their IMF transactions. Furthermore, the new Muslim gold dinar, if succesful, will undercut this process as well. Their actions will tend to support the gold price, as will the actions of Russia and China in increasing their gold reserves. Perhaps these countries have decided that participation in such a process as deceiving their own people is not worth the cost. Or, they may have more recent cultural memories counseling them against the folly of paper money. For example, the French people were so outraged at their aristocratic government's similar manipulations of the assignat currency that they threw them all in jail, and then chopped off their heads. Maybe that is why the French insisted that Nixon should pay in gold.
Lastly, the countries of the G10 have chosen to burn their bridges, and to turn away from 6,000 years of human history in basing their economies on paper gold instead of physical gold reserves. If they are proven wrong, we may be witnessing the decline of the West, and the rise of the East. It would seem wise therefore, for individuals to hedge against such a failure by holding personal stores of gold.
Disclaimer: I am not a broker, financial counselor or market trader. These are only my personal opinions, and not those of GATA or any other organization. They are not recommended as investment advice.
Stuart Shoemaker
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