By: Chris Powell, Secretary/Treasurer, GATA
Remarks by Chris Powell
Secretary/Treasurer, Gold Anti-Trust Action Committee Inc.
Fall Dinner Meeting
Committee for Monetary Research and Education
Union League Club
New York, N.Y.
Thursday, October 20, 2011
CMRE President Elizabeth Currier chose the title of my remarks — “Where in the World Is the Gold?” — and I didn’t argue with her, but if I knew where the gold was, they’d have to kill me. And if I knew and told you before they got to me, you’d all have a big problem too.
But for our purposes tonight it is enough to know that we will never be permitted to know, at least not in the current political circumstances.
Having been raising questions about the gold market for 12 years now, I’ve realized that the amounts, location, and disposition of government gold reserves are secrets more sensitive than the amounts, location, and disposition of nuclear weapons. Indeed, under nuclear weapons control treaties, governments with nuclear weapons have often shared that sort of information, even with hostile powers. But gold reserve information is far more tightly held and most gold information provided officially is actually disinformation.
Why is it this way?
It’s because gold is an even more powerful weapon than nukes — an alternative currency that is not necessarily under any governments power, a determinant of the value of other currencies, interest rates, government bonds, and equities.
It’s not just me saying this. Lawrence Summers, former U.S. Treasury Secretary and off-and-on economics professor at Harvard, said so in the study he wrote with University of Michigan economics professor Robert Barsky in the Journal of Political Economy in 1988, a study titled “Gibson’s Paradox and the Gold Standard.” This study is posted at the Internet site of my organization:
A few weeks ago, maintaining that his “Gibson’s Paradox” study remains dispositive of the gold price issue, Summers provided it to New York Times columnist Paul Krugman — and did so by giving Krugman the link to it at GATA’s Internet site. That’s what Krugman wrote on his blog.
This close correlation among gold, interest rates, and government bond values is why central banks long have tried to control — usually suppress — the price of gold. For gold is the ticket out of the central banking system, the escape from coercive central bank and government power. As an independent currency, a currency to which investors can resort when they are dissatisfied with government currencies, gold carries the enormous power to discipline governments, to call them to account for their inflation of the money supply and to warn the world against it. Because gold is the vehicle of escape from the central banking system, the manipulation of the gold market is the manipulation that makes possible all other market manipulation by government.
That manipulation operates through the largely surreptitious mobilization of Western central bank gold reserves and the gold nominally held by the major exchange-traded funds. If the manipulation was done completely in the open, as governments used to manipulate the gold market, through the gold standard and then through what was called the London Gold Pool, the Western central bank gold dishoarding scheme of the 1960s, the manipulation would fail, because then the world would understand that there isn’t a free market in gold — or in any currency, any more than there is a free market in government bonds.
Anyone can determine this for himself just by putting the unanswerable questions to central bankers and treasury officials.
For example, three years ago, as the International Monetary Fund was constantly announcing plans to sell some of its gold, I wrote to the IMF to try to determine exactly where its supposed gold was kept and whether the IMF had control of its own gold or if that gold was only pledges of gold from its member nations. The most I got out of the IMF was that its bylaws allow its gold to be stored in the United States, Britain, France, and India. When I asked if there ever had been an audit of the IMF’s gold, the IMF’s publicist terminated our correspondence. I was refused information as to where the IMF’s gold was.
At the hearing held on March 25, 2010, by the U.S. Commodity Futures Trading Commission to inquire into the precious metals market, the managing director of the metals consultancy CPM Group in New York, Jeff Christian, a consultant to central banks, testified to what he had published in an explanatory essay in 2000. Christian testified that the world’s biggest gold market, the London bullion market, is actually part of a fractional-reserve gold banking system where many times more gold is sold than is delivered. Most London gold buyers don’t take delivery, and so most gold in client accounts on the books of the London bullion banks doesn’t exist. It is just an unsecured claim against the bullion banks, which presumably have assurances that, in an emergency like a short squeeze, they can obtain gold from central banks.
That is, Western central banks have figured out how to increase gold’s supply by vast amounts without going through the trouble of digging it out of the ground. They help to invent and sustain “paper gold” — imaginary gold that many buyers accept, never suspecting that they’re being deceived and cheated, fooled into thinking that they are buying a finite resource to hedge against the infinite creation of currency, when what they are buying is just as subject to infinite creation as the currency they want to hedge against.
Exchange-traded gold funds are very popular now. Yet the prospectus for the major gold exchange-traded fund says its gold may be held not only by bullion bank HSBC as custodian but also by subcustodians that may not be known to the ETF itself. Further, HSBC is not just custodian for the gold of ETF investors who want their asset to appreciate in value; HSBC is also the biggest known short in the gold market. This is a conflict of interest. And when, a few weeks ago, HSBC tried to respond to concerns about its custodianship of GLD’s gold, the bank committed a very revealing public relations blunder.
HSBC invited CNBC reporter Bob Pisani for a tour of HSBC’s gold vault in the London area. Pisani and his camera operator were placed in a van whose windows had been covered up and then they were driven around for a while and led into the vault. They saw a lot of gold bars, and Pisani was given one to hold up for the camera and represent as a bar belonging to GLD. But some sharp-eyed gold bugs recorded Pisani’s report, transcribed the hallmark and serial number of the bar, and determined that it actually belonged not to GLD but to another gold ETF.
Of course that didn’t prove any impropriety on HSBC’s part — only that it’s very easy for the world’s biggest gold short to merge the gold it is vaulting for customers of its fractional-reserve gold banking system and to apply the gold to where the demand of the day might happen to be.
In August 2009 the international journalist and provocateur Max Keiser reported an interview he had with the Bundesbank, Germany’s central bank, in which he was told that all of Germany’s gold reserves were held in New York. That interview is posted at the YouTube Internet site:
Some people saw the Bundesbank’s admission as a suggestion that Germany’s gold had become the tool of the U.S. government. GATA consultant Rob Kirby of Kirby Analytics in Toronto then pressed the Bundesbank for clarification. The Bundesbank quickly replied to Kirby by e-mail with a denial of Keiser’s report, but the denial was actually pretty much a confirmation:
“The Deutsche Bundesbank,” its reply said, “keeps a large part of its gold holdings in its own vaults in Germany, while some of its gold is also stored with the central banks located at major gold trading centers. This,” the Bundesbank continued, “has historical and market-related reasons, the gold having been transferred to the Bundesbank at these trading centers. Moreover, the Bundesbank needs to hold gold at the various trading centers in order to conduct its gold activities.”
The Bundesbank did not specify those “gold activities” and those “trading centers.” But those “activities” can mean only that the Bundesbank is or recently has been surreptitiously active in the gold market, perhaps at the behest of others — like the United States, the custodian of much of the German gold.
Last year the German journalist Lars Schall, at GATA’s urging, pressed the Bundesbank for clarification about the German gold reserves, and particularly about whether the Bundesbank had undertaken gold swaps with any U.S. government agency. Gold swaps are trades of gold that allow one central bank to intervene in the gold market on behalf of another central bank without getting the latter central bank’s fingerprints directly on the transaction. Schall sent the Bundesbank 13 questions. But the Bundesbank brushed him off, even as it seemed to acknowledge meddling surreptitiously in the gold market:
The Bundesbank replied:
“In managing foreign reserves, the Bundesbank fulfils one of its mandated tasks as an integral part of the European System of Central Banks. We trust you will understand that we are not able to divulge any further information regarding this activity. Particularly with respect to the confidential nature of information about where gold holdings are kept, we are unable to go into any greater detail concerning exact locations and the quantities stored at each of these. Likewise, owing to the strategic nature of the activity, we are not at liberty to provide you with more detailed information about gold transactions.”
In 2009 a New York financial market professional and student of history, Geoffrey Batt, posted at the Zero Hedge Internet site three declassified U.S. government documents involving the gold market. The first was a long cable dated March 6, 1968, sent by someone named Deming at the U.S. Embassy in Paris to the State Department in Washington. It has been posted at the Zero Hedge Internet site:
The cable described the strains on the London Gold Pool, the gold-dishoarding mechanism established by the U.S. Treasury and the Bank of England to hold the gold price to the official price of $35 per ounce. The London Gold Pool was to last only six months longer.
The cable is a detailed speculation on what would have to be done to control the gold price and particularly to convince investors “that there is no point anymore in speculating on an increase in the price of gold” and “to establish beyond doubt” that the world financial system “is immune to gold losses” by central banks.
The cable recommended creation of a “new reserve asset” with “gold-like qualities” to replace gold and prevent gold from gaining value. To accomplish this, the cable proposed “monthly or quarterly reshuffles” of gold reserves among central banks — what the cable called a “reshuffle club” that would apply gold where market intervention seemed most necessary.
Of course these “reshuffles” sound very much like the central bank gold swaps and leases of recent years.
The idea, the cable says, is for the central banks “to remain the masters of gold.”
Also disclosed in 2009 by Zero Hedge’s Geoffrey Batt was a memorandum from the Central Intelligence Agency dated December 4, 1968, several months after the collapse of the London Gold Pool. This too has been posted at the Zero Hedge Internet site:
The CIA memo said that to keep the dollar strong and prevent “a major outflow of gold,” U.S. strategy would be:
“– To isolate official from private gold markets by obtaining a pledge from central banks that they will neither buy nor sell gold except to each other.”
“– To bring South Africa to sell its current production of gold in the private market, and thus keep the private price down.”
The third declassified U.S. government document published by Geoffrey Batt at Zero Hedge in 2009 may be the most interesting, because it was written on June 3, 1975, four years after the last bit of official fixed convertibility of the dollar and gold had been eliminated and the world had been told that currencies henceforth would float against each other and against gold and that gold would be free-trading.
The document is a seven-page memorandum from Federal Reserve Board Chairman Arthur Burns to President Gerald Ford. It is all about controlling the gold price through foreign policy and defeating any free market for gold. It has been posted at GATA’s Internet site:
Burns tells the president: “I have a secret understanding in writing with the Bundesbank, concurred in by Mr. Schmidt” — that’s Helmut Schmidt, West Germany’s chancellor at the time — “that Germany will not buy gold, either from the market or from another government, at a price above the official price of $42.22 per ounce.”
Burns adds, “I am convinced that by far the best position for us to take at this time is to resist arrangements that provide wide latitude for central banks and governments to purchase gold at a market-related price.”
Yes, government can’t abide markets in gold.
While the Burns memo is consistent with the long-established interest of central banks in controlling the gold price, it was written 36 years ago.
But there is a contemporaneous admission of U.S. government intervention in the gold market. It came out of GATA’s long Freedom of Information Act struggle with the U.S. Treasury Department and Federal Reserve for information about the U.S. gold reserves and gold swaps, information that first was denied to GATA on the grounds that it would compromise certain private “proprietary” interests. (Of course such a denial, a denial based on “proprietary” interests, is in itself confirmation that the U.S. gold reserve has been placed, at least partly, in other hands.)
Responding to President Obama’s declaration, soon after his inauguration, that the federal government would be more open, GATA renewed its informational requests to the Fed and the Treasury. These requests concentrated on gold swaps.
Of course both requests were denied again. But through its Washington lawyer, William J. Olson (www.lawandfreedom.com), GATA brought an appeal of the Fed’s denial, and this appeal was routed to a full member of the Fed’s Board of Governors, Kevin M. Warsh, formerly a member of the President’s Working Group on Financial Markets, nicknamed the Plunge Protection Team. Warsh denied GATA’s appeal but in his letter to our lawyer he let slip some stunning information:
Warsh wrote: “In connection with your appeal, I have confirmed that the information withheld under Exemption 4” — that’s Exemption 4 of the Freedom of Information Act — “consists of confidential commercial or financial information relating to the operations of the Federal Reserve Banks that was obtained within the meaning of Exemption 4. This includes information relating to swap arrangements with foreign banks on behalf of the Federal Reserve System and is not the type of information that is customarily disclosed to the public. This information was properly withheld from you.”
So there it is: The Federal Reserve today — right now — has gold swap arrangements with “foreign banks,” and the public and the markets must not be permitted to know about them.
Eight years ago Fed Chairman Alan Greenspan and the general counsel of the Federal Open Market Committee, Virgil Mattingly, vigorously denied to GATA, through two U.S. senators who had inquired of the Fed on our behalf, that the Fed had gold swap arrangements, even though FOMC minutes from 1995 quote Mattingly as saying the U.S. indeed has engaged in gold swaps:
But now the Fed has admitted such arrangements, if only inadvertently.
As GATA was not willing to let Fed Governor Warsh’s letter be the last word on access to the Fed’s gold records, on December 31, 2009, we sued the Fed in U.S. District Court for the District of Columbia under the Freedom of Information Act. The Fed told the court that the Fed really couldn’t find many records involving gold. Implausible as this was, the judge, Ellen Segal Huvelle, denied GATA’s request to interrogate Fed officials under oath about what seemed to us to be their grossly inadequate search. Whereupon the judge reviewed, privately in her chambers, the few documents the Fed had submitted, and on February 3 this year she ruled that the Fed indeed could keep secret all but one of those documents. She ordered the Fed to disclose that one document to GATA within two weeks.
On February 18 this year, heeding the court’s order, the Fed released the document — the minutes of the April 1997 meeting of the G-10 Gold and Foreign Exchange Committee as compiled by an official of the New York Federal Reserve Bank. The minutes showed government and central bank officials from around the world conspiring in secret to coordinate their gold market policies. The minutes are posted at GATA’s Internet site:
Perhaps of equal importance, the Fed claimed not to be able to find minutes of any other meeting of the G-10 Gold and Foreign Exchange Committee. Either the the G-10 Gold and Foreign Exchange Committee has met only that once, in April 1997, or the Fed was not represented at any other such meetings, or, more likely, such minutes were conveniently misplaced to keep them away from GATA’s lawsuit.
Thus GATA’s lawsuit established that, despite its public denials, the Fed has many gold secrets after all. Our lawsuit also managed to pry a couple of those secrets loose and publicize them — first, that the Fed has gold swap arrangements with foreign banks, and second, that at a secret meeting in 1997 the Fed was conspiring with other central banks to coordinate their gold market policies and that there was never any announcement of this undertaking.
Almost as gratifying to us was that, since the court found that the Fed illegally withheld from us the minutes of the secret G-10 Gold and Foreign Exchange Committee meeting, the Fed was ordered to pay court costs to GATA, which the Fed did in May, sending us a check for $2,870. An image of that check also is posted at GATA’s Internet site:
Years ago GATA disclosed that the International Monetary Fund, the leading compiler of official gold reserve data, allowed its member nations to count gold they had leased, gold that had left their vaults, as if it was still in their vaults. The effect of this accounting fraud is to deceive the market into thinking that central banks have much more gold left to bomb the market with than they really do.
But that’s only the start of the false official gold data.
In April 2009 China caused a sensation by announcing that its gold reserves had increased by 76 percent, from 600 tonnes to 1,054 tonnes. For the previous six years China had been reporting to the IMF only 600 tonnes. Had China acquired those 454 new tonnes only in the last year? Very unlikely. Most experts believe that China acquired those 454 new tonnes over at least several years, largely by purchasing the production of China’s own fast-growing gold mining industry. So for as many as six years the official gold reserve data about China was way off:
Last June the World Gold Council reported that Saudi Arabia’s gold reserves had increased by 126 percent, from 143 to 323 tonnes, just since 2008. That the world’s oil-exporting superpower had made such a new commitment to gold in its foreign exchange reserves also caused a sensation.
But a few weeks later the governor of the Saudi Arabia Monetary Authority, Muhammad al Jasser, insisted to news reporters that Saudi Arabia had not purchased the gold cited in the June reports but rather had possessed that extra gold all along, holding it in what he called “other accounts”:
That is, the seemingly new Saudi gold had been held in accounts never reported officially, just as the true status of China’s gold accounts was not reported officially for six years, if the true status is being reported even now.
Some analysts think that China and Saudi Arabia have accumulated far more gold than they’re reporting and are accumulating still more gold surreptitiously — China to hedge its dollar foreign exchange surplus, Saudi Arabia to hedge both its dollar surplus and the depletion of its oil reserves — but that China and Saudi Arabia can’t acknowledge this accumulation lest they spook the currency markets, explode the gold market, and devalue their dollar surpluses before those surpluses are fully hedged.
In May this year Mexico’s central bank announced that it recently had purchased 93 tonnes of gold, bringing its gold reserves to 100 tonnes. But last month the Mexican journalist Guillermo Barba reported that the Bank of Mexico refuses to disclose where it is keeping those 93 tonnes and apparently doesn’t even know the form of the gold it claims to have purchased:
Apparently in purchasing gold this year the Bank of Mexico became only an unsecured creditor of banks that are members of the London Bullion Market Association, home of fractional-reserve gold banking and primary mechanism of the gold price suppression scheme.
The United States claims to hold more than 8,100 tonnes of gold. But has any of that gold been swapped with other central banks through the gold swap arrangements Fed Governor Warsh disclosed in his letter denying GATA’s request for access to the Fed’s gold documents? The Fed refuses to release its records on the issue.
Keep all this in mind when you hear the common disparagement about gold — that even with its steady rise in price over the last decade, gold has not come close to keeping pace with inflation, that gold is a terrible inflation hedge. Oil has kept up, food has kept up, other metals have kept up, all the things that are used as measures of inflation have, by definition, kept up with inflation — but not gold.
So why not? Why hasn’t gold kept up with inflation?
It’s because Western governments found ways of vastly increasing what the world thinks is the supply of gold without having to go through the trouble of mining it — to dishoard and lease it from central bank reserves and, through Western bullion banks, to issue certificates of deposit against gold that never existed in the first place.
So where in the world is the gold? Most likely in your dreams.