The Visible Hand of Uncle Sam and How the “Free Market” works

by Eric deCarbonnel

Goldensextant reports about the Exchange Stabilization Fund and the manipulation of gold.

(emphasis mine) [my comment]

February 1, 2000. Two Bills: Scandal and Opportunity in Gold?

Evidence is accumulating that the administration of Bill Clinton may have turned the Exchange Stabilization Fund (the “ESF”) into a political slush fund to make itself look good and simultaneously profit some of its closest Wall Street friends and supporters. Specifically, the known facts support credible allegations that the Clinton administration has effectively capped the gold price by using the ESF to backstop the selling of gold futures and other gold derivative products by politically well-connected bullion banks. Such interference in the free market price of gold would undermine its traditional role as a leading indicator of inflation. And it would do so at the same time that the administration’s many adjustments to the CPI have rendered that lagging indicator of inflation also suspect. Among the bullion banks most heavily involved in selling gold futures and purveying gold loans, forward sales and other derivatives that undercut its price is Goldman Sachs, former Treasury Secretary Robert Rubin’s old firm.

These are serious allegations, but the current administration scarcely merits much benefit of the doubt. If these allegations are incorrect, Treasury Secretary Summers can deny them in unequivocal language as Fed Chairman Alan Greenspan did two weeks ago with regard to similar allegations of gold price manipulation by the Fed. Indeed, in a formal letter to Senator Lieberman (Dem., Conn.) (reprinted at, the Fed chairman not only denied that the Fed had intervened in the gold or gold derivatives markets, but also added: “Most importantly, the Federal Reserve is in complete agreement with the proposition that any such transactions on our part, aimed at manipulating the price of gold or otherwise interfering in the free trade of gold, would be wholly inappropriate.” [Emphasis supplied.]

The odd behavior of the gold price over the past five years, including massive gold leasing and heavy bouts of futures selling apparently timed to abort threatened rallies, has generated considerable speculation regarding intentional manipulation by governmental authorities. What has made weakness in the gold price all the more perplexing are mounting shortfalls of new mine production relative to annual demand. Because most nations deal in gold through their central banks, they are prime suspects. Clarifying remarks that he made to Congress in 1998, Mr. Greenspan confirmed in his letter to Senator Lieberman that some central banks other than the Fed do in fact lease gold on occasion for the express purpose of trying to contain its price. Gold leased by central banks to bullion banks is typically sold by them into the market in connection with arranging forward sales by gold mining companies or making gold loans to mining companies or others. The attraction of gold loans is their typically low interest rates (known in the trade as “lease rates”) of around 2%.

The Fed and the ESF are the only arms of the U.S. government with broad statutory authority “to deal in gold” and thus by reasonable extension in gold futures and derivatives. Were the Fed to engage in such activities, it would of necessity have to do so subject to all the institutional safeguards that govern its more important functions. Unlike the Fed, the ESF is virtually without institutional structure or safeguards. It is under the exclusive control of the Secretary of the Treasury, subject only to the approval of the President. Indeed, direct control and custody of the ESF must rest at all times with the President and the Secretary. The statute further provides (31 U.S.C. s. 5302(a)(2)): “Decisions of the Secretary are final and may not be reviewed by another officer or employee of the Government.”

Originally funded out of the profits from the 1934 gold confiscation, the little known ESF is available for intervention in the foreign exchange markets. In the absence of a Congressional appropriation, the Clinton administration used funds from the ESF to finance the 1995 U.S. bailout of Mexico. However, accepting the Greenspan dictum that it “would be wholly inappropriate” for the Fed ever to intervene in the gold market to manipulate the price, it is hard to imagine any situation in which such intervention would be appropriate by the ESF, never mind one involving large profits for the former investment bank of the Secretary himself.

Last week, in response to an inquiry from Bridge News, Secretary Summers “categorically denied” that the Treasury was selling gold. With all due respect to the Secretary, this is not the allegation that knowledgeable gold market participants and observers are making. Their allegation is that the ESF — by writing gold call options or otherwise — is making sufficient gold cover available to certain bullion banks to allow them safely to take large short positions in gold, thereby putting downward pressure on the price and in the process making huge profits for themselves.

Two devices that have put the most pressure on the gold price in recent years are sales of gold futures contracts on certain public exchanges, the COMEX in New York being the largest and most important, and sales of leased gold in connection with gold loans and forward selling by miners. Bullion banks that engage in these activities must of necessity take short positions in gold. While these positions can result in large profits for them when the gold price declines, they can — if unhedged — also result in large losses should the gold price rise.

The most common tactic used by bullion banks to hedge against such losses is the purchase of gold call options, usually from gold producers, other large holders of physical gold, or entities with sufficient financial resources to guarantee cash settlement. In the absence of such protection, bullion banks leasing gold or selling large amounts of gold futures contracts for their own account (or the accounts of any but the strongest gold credits) would be forced to assume risky net short positions on which they could sustain huge losses in the event of an upward spike in the gold price. At the same time, sellers (often called “writers”) of gold call options also assume risk, for they will be called upon to provide gold (or equivalent cash settlement) to the bullion banks in the event that the gold price rises above the strike prices of the options.

Given its own resources of something like $40 billion and its connection to the U.S. Treasury, which controls the nation’s official gold reserves of about 8150 metric tonnes, the ESF has the ability to write gold call options in circumstances where private parties would not. Should it do so, it can effectively permit favored bullion banks to engage in gold futures selling and gold leasing under conditions where they would otherwise be forced to curtail these activities as perceptions of increasing risk rendered call options from private sources either too expensive or even unavailable. What is more, the ESF can write these options clandestinely so as to camouflage the true source of what otherwise appears as inexplicable downward pressure on gold, thereby creating market uncertainty that itself augments bearish sentiment and increases the profits of bullion banks privy to the scheme.

With the Fed’s announcement that it, unlike some other central banks, does not operate in the gold or gold derivatives markets, the focus of suspicion naturally shifted to the ESF. But to understand fully why gold market participants and observers increasingly sense market manipulation originating somewhere in the U.S. government, it is necessary to recount and highlight some recent history of the gold market, particularly for those not fully conversant with it. And even for those who are, Fed Chairman Greenspan’s recent letter requires reassessment of working hypotheses involving assumptions of gold price manipulation by the Fed. More detail on much of what follows can be found in earlier essays and commentaries here at The Golden Sextant, together with various links to supporting or explanatory information.

The story begins in 1995. Gold is slumbering as it has for some time around US$375/oz. Japan’s economic situation is worsening, and in mid-1995 the Japanese cut interest rates sharply. Gold begins to stir, jumping over $400 in early 1996, propelled in part by Japanese interest rates so low that they force yen denominated gold futures on the TOCOM into backwardation (i.e., when prices for future delivery are lower than spot). The yen is falling; gold lease rates are rising. From the U.S. perspective, an economic collapse in Japan threatens to exacerbate the U.S. trade deficit and possibly trigger massive dishoarding of Japan’s large holdings of dollar denominated debt, including U.S. Treasuries.

From the European perspective, there is concern not only about the obvious economic effects of a Japanese collapse, but also that it might cause sufficient disruption in the existing international payments system to complicate severely or even prevent the planned introduction of the euro in 1999. An accelerating gold price responding to world financial turmoil is hardly a propitious environment for the introduction of a new and untested currency.

The G-7 central banks and finance ministers cobble together a plan to support Japan, including a strategy for controlling the gold price through anti-gold propaganda backed by small but highly publicized official gold sales augmented by leasing of official gold in large quantities at concessionary rates. For Belgium and the Netherlands, the largest European sellers, gold sales also help to meet the Maastricht Treaty’s criteria for the euro.

Gold analysts, who at the beginning of 1996 were almost unanimous in predicting a new bull market for gold, are blind-sided. Virtually none foresaw such a coordinated official attack on gold, and many are slow to recognize its broad scope. The gold price steadily declines from over $400 in early 1996 to well under $300 in early 1998, and stays under $300 for most of 1998 and into early 1999. Every time gold looks to rally, it is slammed on the LBMA or COMEX by the same small group of well-connected bullion banks. Particularly notable in these attacks are Goldman Sachs, Chase and Mitsui, which regularly runs by far the largest net short position on the TOCOM.

Scared by falling prices and encouraged to do so by their bullion bankers who are also their lenders, many gold mining companies respond by increasing their hedging activities, expanding forward sales and buying more gold put options. The forward sales, generally made with gold leased from central banks through bullion banks, add to the downward pressure on gold and provide fees to the bullion banks, augmented by further windfall profits on the loaned gold as the price continues to fall. The bullion banks earn further fees by selling put options to the mining companies, who frequently are forced to finance buying shorted-dated puts from the bullion banks by selling them long-dated calls.

Trading around $280 in April 1999, gold is below the total cost of production for many mines and not far above the cash costs of quite a few. What is more, annual gold demand is now almost 4000 tonnes, exceeding annual new mine production of 2500 tonnes by almost 1500 tonnes. This deficit, building over several years, is largely filled by sales of gold leased from central banks by the bullion banks. Analysts trying to calculate the net short gold position of the bullion banks in early 1999 are coming up with some astonishing figures, some as high as 10,000 tonnes, equivalent to four full years of production.

Since much of this leased gold is sold into the Asian jewelry market, particularly to India which regularly absorbs 25% to 30% of annual world production, many question where all the gold necessary for repayment will be found. But at the beginning of 1999, some is expected to come from the proposed sale of over 300 tonnes by the IMF to raise funds for aid to heavily indebted poor countries, an initiative strongly supported by the U.S. and Britain.

On May 6, 1999, gold again nears $290 and is threatening to explode above $300 due in part to increasing doubts that the proposed IMF gold sales will be approved. Short positions are in grave peril. Then comes a wholly unexpected bombshell which will have even more unexpected consequences.

On May 7, 1999, the British announce that the Bank of England on behalf of the British Treasury will sell 415 tonnes of gold in a series of public auctions ostensibly to diversify its international monetary reserves. The manner of the British sales — periodic public auctions instead of hidden sales through the BIS — belie any effort to get top dollar and smack of intentional downward manipulation of the gold price. All indications are that these sales were ordered by the British government over the objection of BOE officials. Palpably spurious and inconsistent reasons for the sales are offered, but no persuasive ones. There is only one logical conclusion: the gold sales were directly ordered by the Prime Minister for unknown political or other reasons. What is more, his reasons are unlikely to have been frivolous. As leading supporters of the proposed IMF gold sales, the British clumsily put themselves in the position of front-running them, and ultimately the British sales are an important catalyst in forcing the IMF to change tack.

For most knowledgeable gold market participants and observers, the British announcement is the smoking gun — proof positive that the world gold market is being manipulated with official connivance and support. But what none yet suspects is that the BIS, the ECB and the central banks of the EMU countries are having serious second thoughts about the gold manipulation scheme.

The British announcement quickly sends the gold price into near free fall toward $250. Gold mining companies panic. Urged on by the bullion banks, led again by Goldman Sachs [who is the treasury’s agent], the miners add to their hedge positions. The very dangerous practice of financing short-dated puts with long-dated calls expands exponentially as financially strapped mining companies, threatened with reduction or loss of credit lines by their bullion bankers, are often left with little other choice. Then comes a second and even larger bombshell that takes the bullion bankers and their customers completely by surprise. Indeed, it is likely a watershed event for the entire world financial system, comparable only to the closing of the gold window in 1971.

On September 26, 1999, 15 European central banks, led by the ECB, announce that they will limit their total combined gold sales over the next five years to 2000 tonnes, not to exceed 400 tonnes in any one year, and will not increase their gold lending or other gold derivatives activities. Besides the ECB and the 11 members of the EMU, Britain, Switzerland and Sweden are parties. The 2000 tonnes include the remaining 365 tonnes of British sales and 1300 tonnes of previously proposed Swiss sales, leaving only 335 tonnes of possible new sales. The announcement, made in Washington following the IMF/World Bank annual meeting, is ironically christened the “Washington Agreement” although the government in Washington played no role. However, the BIS, IMF, U.S. and Japan are all expected to abide by it, and the BIS is expected to monitor it.

The effect in the gold market is quick and dramatic. Within days, as some gold shorts rush to cover, the gold price jumps from around $265 to almost $330 and gold lease rates spike to over 9%. By late October gold retreats back under $300, and a month later lease rates are almost back to normal levels. But the hugely over-extended net short position in the gold market is clearly revealed and far from being resolved. Two heavily hedged gold mining companies, Ashanti and Cambior, are virtually bankrupt and in negotiations with their bullion bankers. Indeed, soon the entire rationale of hedging is under comprehensive review throughout the gold mining industry as shareholders rebel at practices that take away the upside of their gold investments.

As the details of Ashanti’s and Cambior’s hedge books are disclosed, the recklessness of gold hedging strategies foisted onto to them by their bullion bankers becomes all too apparent. Ashanti’s lead bullion banker, Goldman Sachs, is the subject of scathing comment, including allegations of serious conflicts of interest. See, e.g., L. Barber & G. O’Connor, “How Goldman Sachs Helped Ruin and then Dismember Ashanti Gold,” Financial Times (London), Dec. 2, 1999, reprinted at Clearly the most aggressive bullion bankers have been caught completely wrong-footed and totally unawares by the Washington Agreement. Significantly, rumor is that the agreement was hammered out secretly among the members of the EMU, the BIS and Switzerland, that the British were given a chance to sign on after the fact, and that the U.S. was not informed until just before the Sunday announcement. For references to European press commentary on the genesis of the agreement, see W. Smith, “Operation Dollar Storm,”

Besides the three provisions relating directly to central bank activities in the gold market and one calling for review after five years, the Washington Agreement contains this statement: “Gold will remain an important element of global monetary reserves.” The ECB and 11 EMU nations hold collectively around 12,500 tonnes of gold reserves (almost 1.4 ounces per citizen), making the EMU as a whole by far the world’s largest official holder of gold. What is more, unlike the U.S. which values its gold stock of about 8150 tonnes (under 1 ounce per citizen) at an unrealistic $42.22/oz., the EMU marks its gold reserves to market quarterly.

The notion, shared by many, that the EMU would forever acquiesce in the trashing of its gold reserves by bullion banks operating in the largely paper gold markets of London, New York and Tokyo appears in retrospect to have been incredibly naive. Indeed, a careful reading of the 69th annual report of the BIS issued in June 1999 suggests that European central bankers were already questioning the effectiveness and sustainability of Japan’s low interest rate policy, and were very concerned about the implications of the LTCM incident for the world payments system. With the euro successfully launched, they quickly lost reason to continue capping the gold price and became much more concerned about the increasingly parlous state of the gold banking system to which they were lending.

Often referred to as the central banks’ central bank, the BIS is not only the principal forum for discussion and cooperation among the world’s central bankers but also the world’s top gold bank. Established under international treaty in 1930 to facilitate payment of German war reparations, the BIS from its founding has kept its financial accounts in Swiss gold francs, making conversions at designated or market rates as appropriate. It holds approximately 200 tonnes of gold for its own account and records on its balance sheet separate gold deposit and gold liability accounts in connection with the banking services it provides to central banks and other international financial institutions. That the BIS in early 1999 was not as aware as gold analysts in the private sector of the bullion banks’ dangerously leveraged condition is almost inconceivable.

Fed Chairman Greenspan’s letter to Senator Lieberman is highly significant in that it tends to negate the impression many had, including myself, that a rift had developed between the Anglo-American central banks and those of the EMU over gold. Rather, the Fed’s position as expressed in the letter, together with the BOE’s position that the decision to sell British gold came from Her Majesty’s Treasury, implies a rift not among the major central banks, but between them and the British and American governments operating through their Treasury departments. In this connection, the Fed and the BOE labor under a handicap that does not affect the Europeans, for whereas the central banks of the EMU have direct legal responsibility for their nations’ gold reserves, in both Britain and the U.S. this responsibility rest with their Treasury departments.

What is more, a quite plausible scenario now appears to explain the British gold sales. Whether it is true or not, only a very few high officials in the British and American governments and their bullion bankers are in a position to know for sure. But on known and reasonably inferred facts, the following hypothesis can be constructed.

The ESF was writing gold call options for certain bullion bankers, principally those most active in selling futures and arranging forward sales: Goldman Sachs, Chase, et al. As of April 30, 1999, it had outstanding a sizable position at strike prices in the $300 area. For writing these options in a generally falling market, it had net earnings from premiums but these were not in context large amounts, at most a very few dollars per ounce. In the ESF’s monthly financial reports required to be filed with the Senate and House Banking Committees, these amounts were listed as miscellaneous income.

When gold threatened to explode over $300 in early May, and with IMF’s proposed gold sales in trouble, the ESF found itself in much the same position as that of Ashanti and Cambior after announcement of the Washington Agreement. Gold call options previously sold for a few dollars an ounce threatened to cause losses many multiples of these amounts if the gold price jumped by $50 to $75. If settled in cash, exploding volatility premiums would add hugely to the loss, putting the effective strike price far above the nominal one. On the other hand, if settled in gold at the strike price, the ESF would have to deliver gold from U.S. reserves or go into the market to cover, adding more upward pressure to the gold price.

Worse, unlike the modest premium income from sales of options, huge losses could not be hidden from Congress in the monthly financial reports to the House and Senate Banking Committees. Not to panic. The ESF, being under the direct control of the Secretary and the President, has an option not available to others. Call the British Prime Minister and arrange for a very public official gold sale designed to kill the incipient gold price rally. And for God’s sake don’t let the BOE or the Fed know what is really afoot. If some of their inflation hawks knew the real situation in the gold market, they might be more inclined to raise interest rates.

USAgold reports about the ESF.

… The ESF is a slush fund beyond Congressional oversight. It can be used to ‘get around’ most anything (i.e., it can skirt normal governmental procedures). No wonder so many people want to do away with the ESF. There is no room for it in our democratic process. It is not subject to the normal checks-and-balances so carefully crafted by the Founding Fathers that have proven over time to be so essential for control within the federal government. The ESF is the antithesis of the American foundation of representative government because it subjects a free people to an unconstitutional governmental force. Still not convinced? Here are some more excerpts:

MR. LINDSEY. My second question has to do with our credibility. I don’t know what questions to ask, and I hope you will help me out in that regard. I have this document in front of me, which includes a page entitled “What is the Exchange Stabilization Fund?” The document came from Treasury International Affairs. I gather it was written by them. I have written enough of these to know what you do, and that is to tell your point of view. Paragraph 3, not to mention the dots indicating an omission in paragraph 2, got me a little nervous. Paragraph 3 says these holdings in the ESF are used to enter into swap arrangements with foreign governments, to finance exchange market intervention, to provide short-term bridge finance, etc., and all these things are great. So, basically paragraph 3 is establishing that this is not unprecedented. My question would be: Do we do all these nice things if it’s not in support of the dollar? Is this unprecedented with regard to the fact that we are supporting another currency?

MR. TRUMAN [former Federal Reserve’s international staff and former Assistant Secretary of the Treasury]. The language before the dots is–

MR. LINDSEY. I am talking about the third paragraph. I will go to the second paragraph in a second. I’m sorry. I am running a little out of order. It is saying the ESF has done all these things.

MR. TRUMAN. The legislation governing the objectives of the ESF was changed, I think for the most part in the mid- to late-1970s. The changes included the language that the government of the United States and the International Monetary Fund have the obligation to promote orderly exchange rate arrangements leading to a stable system of exchange rates. That was interpreted to include making loans to Bolivia in helping it maintain a system of stable exchange rates.

MR. LINDSEY. So that has happened before?

MR. TRUMAN. Yes. They have made loans to or financial arrangements with at least 31 countries around the world over the last 50 years.

MR. LINDSEY. I think we all will be asked questions about this. Can you read this paper and tell me that there is not something missing that I should know about, meaning that this is not only the truth but the whole truth?

MR. TRUMAN. I can only say that Treasury lawyers have looked into the question of whether these operations are legal under this broad authorization of what they can do and what the purpose is–

MR. MATTINGLY. If I can help out?


MR. MATTINGLY. It’s pretty clear that these ESF operations are authorized. I don’t think there is a legal problem in terms of the authority. The statute is very broadly worded in terms of words like “credit” ­ it has covered things like the gold swaps ­ and it confers broad authority. Counsel at the White House called the Treasury’s General Counsel today and asked “Are you sure?” And the Treasury’s General Counsel said “I am sure.” Everyone is satisfied that a legal issue is not involved, if that helps. [Emphasis added]

MR. LINDSEY. Is there anything missing on this page?

MR. MATTINGLY. No, there is not. If you look at the last paragraph, for example, that is part of the statute.

MR. LINDSEY. About notifying Congress in writing in advance?

MR. MATTINGLY. The statute says that with the permission of the President they can make loans.

There you have it. The ESF doesn’t have to notify Congress about anything in advance. It is under the sole authority of the Secretary of the Treasury and the President, and they can do “gold swaps” without any Congressional approval, which brings up an important point I made in “The Smoking Gun”.

I had noted a curious pattern in the correspondence emanating from the Treasury Department. The Secretary of the Treasury never answered any questioning letters concerning the ESF, even if they were written directly to him. Rather, one of his assistants invariably responded. I therefore wondered whether the Treasury Department chain of command was being relied upon just like President Nixon had tried to rely upon the White House chain of command in an attempt to avoid being sucked into the vortex of a growing Watergate scandal. I even asked in “The Smoking Gun”: “Did Secretary Summer’s knowledge of the goings-on in the secretive ESF explain why his underlings, and not him, were writing the letters denying US government involvement within the Gold market?” The above excerpts from the FOMC transcript clearly establish that my question needs answering.

It is becoming increasingly clear as more and more evidence emerges that the Secretary of the Treasury does not answer questions concerning the ESF because he, but not his underlings, know to what extent the ESF is engaged in gold related activity. His underlings can say that the ESF is not involved in the gold market because as far as they know, what they say is true. However, we now have sufficient evidence proving that the ESF is indeed involved in the gold market. Therefore, the Secretary of the Treasury does not respond to letters asking questions about the ESF and its activity in the gold market. He can’t answer them truthfully without ‘spilling the beans’. He obviously knows everything about what really is going on within the ESF, in contrast to his underlings. Or at least most underlings because it appears that one of them is in there up to his elbows washing ESF laundry. His name is Ted Truman.

From the FOMC transcripts it is quite apparent that Ted Truman has a special role. Though recorded in the attendee list in the FOMC transcripts under the featureless title of “economist”, his role is anything but ordinary. The transcripts reveal that he clearly speaks for the Treasury Department in FOMC meetings, and is very knowledgeable about the ESF. The insight displayed by him in the FOMC minutes makes it clear that he is not just fully informed about the ESF and its operations, but that he probably is also intimately involved in ESF decision making. Consequently, the following excerpt is particularly intriguing.

MR. PARRY. What is the size of the ESF?

MR. TRUMAN. The usable funds in the ESF today, counting the foreign exchange as usable, amount to roughly $25 billion.

MR. PARRY. Can you say how it is broken down?

MR. TRUMAN. About $5 billion is invested in Treasury securities and the balance is roughly equally divided between marks and yen. I think they have slightly more yen than marks.

MR. PARRY. Thank you.

MR. BOEHNE. Is any of it obligated in any way beyond what we are talking about with Mexico?

MR. TRUMAN. It is obligated only in the sense that they have one other swap arrangement with the Bundesbank.

Wouldn’t it be interesting to know what this swap arrangement with the Bundesbank entailed? What is the nature of this swap? Is it a Dollar/Deutschemark swap facility? Or is something else being swapped, like gold perhaps?

Gold being swapped with the Bundesbank? It’s an outrageous thought. Or is it? I have already established that the ESF is very much involved with gold. The only thing I haven’t established is with whom the ESF has those gold swaps that Virgil Mattingly was talking about.

Let’s put one and one together here to see if we can come up with an answer. According to Virgil Mattingly, the ESF has authorized gold swaps, presumably in the recent past (circa 1995). According to Ted Truman, the only outstanding swap facility of the ESF (circa 1995) other than the one established for Mexico is their facility with the Bundesbank. Ergo, the ESF has a gold swap facility with the Bundesbank.

It’s an interesting proposition, and one that fits well with another newly discovered fact. Some very interesting sleuthing by Mike Bolser, who has been assisting Reg Howe in his lawsuit against the BIS, has revealed that the Treasury has made a small but very significant accounting change. Mike noticed that the Treasury Department has changed the designation of nearly 1700 tonnes of inventoried gold at the US Mint’s facility in West Point, New York (approximately 21% of the total US Gold Reserve) from “Gold Bullion Reserve” to “Custodial Gold”.

I’ve already put one-and-one together to establish that the ESF has “gold swaps” with the Bundesbank. It therefore does not require much conjecture to add one supposition to the equation by concluding that the gold in West Point has been swapped with gold owned by the Bundesbank, thereby necessitating its reclassification from “Gold Bullion Reserve” to “Custodial Gold”. Here’s what I think has happened.

The Treasury Department wanted to make gold available to some bullion banks. This statement is based on my basic premise that several of the big banks have gold books that are hopelessly imbalanced. By having borrowed short and loaned long, these banks have in their quest for profits imprudently fallen into the alluring but usually fatal banker’s deathtrap ­ a mismatched loan book. But what’s worse for these banks, it is even more difficult and treacherous to try extricating themselves from this particular deathtrap because they haven’t mismatched their loan book of dollars, which we all know can be created by the Federal Reserve ‘out of thin air’ if dollars are needed to bailout banks from a deathtrap predicament. Instead, these banks have mismatched their gold book. And no one ­ not even the Federal Reserve ­ can create gold out of thin air.

So given this reality about the nature of gold, the Treasury had to turn elsewhere to find the gold necessary (1) to keep these banks from defaulting on their bullion obligations arising from their mismatched gold books in an environment where metal had become increasingly difficult to come by and/or (2) to keep the gold price low so that the likelihood of default by the banks would be lessened, even though metal would remain tight because fabrication year after year was exceeding newly mined supply. Rather than accept the bitter pill that certain banks were about to default on their bullion obligations, the Treasury looked for alternatives and found one: ­ they put their hand into the till, until recently known as the Gold Bullion Reserve at West Point. They swapped this gold with the Bundesbank. I’ll explain how they did it, but let’s first consider the practical aspects of this transaction.

In all likelihood, these particular bullion banks needed gold in Europe where their obligations were originally established. There is very little gold lending in New York. It is a practical problem to ship the gold out of West Point without raising the alarm of government auditors. It is costly too. Also, it is likely that some of the gold in West Point is coin-melt from the 1933 gold confiscation. Even if it could be smuggled out of the West Point vault into the market without raising suspicions, the alarm bells would go off at the refiner and soon thereafter in the market because everyone knows that only the US government has coin-melt bars. The appearance of coin-melt bars in the market would immediately raise suspicions that the US Gold Reserve was being dishoarded, an outcome that the Treasury would obviously take steps to avoid in concocting its scheme because the US Gold Reserve cannot be depleted without Congressional approval. Therefore, one is faced with the practical considerations of overcoming these hurdles, but the answer is relatively simple.

The Treasury has gold in West Point. The Bundesbank has gold in Europe. The Treasury cannot directly do a deal with the Bundesbank because unlike the ESF, the Treasury is subject to Congressional oversight. So instead the Secretary of the Treasury and the President decide to use the ESF to set up a swap line for gold with the Bundesbank.

By so doing, the gold in the Bundesbank’s vault in Europe becomes ESF gold, to do with as they please ­ i.e., the ESF lends this metal to bailout certain bullion banks. And the Bundesbank now owns the gold in West Point, which as a result was purposefully reclassified from Gold Bullion Reserve to Custodial Gold because the Treasury no longer owns this gold, having swapped it out through the ESF in exchange for gold in Europe owned by the Bundesbank. Case closed. The mystery of the abnormally low gold price is solved. The ESF did it.

The abnormally low gold price is the result of the mounting irrefutable evidence that the ESF is deeply involved in the gold market, and I do mean deep. They are involved in some 1,700 tonnes worth because that is the weight of gold stored in West Point, which was probably being swapped at the rate of a few hundred tonnes per year from circa 1995 through 2000. There are two other tidbits that I would like to share with you that add even more validity to this supposition.

First, a couple of months ago I was analyzing the 1998 and 1999 balance sheets of the ESF. Being an ex-banker, I know a little bit about accounting, including where to find the big holes through which the proverbial truck can be driven. And suffice it to say, I found one of those, which could suggest that in these two years 975 tonnes of gold came into the market from the ESF. Interestingly, after reaching this conclusion, I wanted to test it. So I called a top gold market expert whose supply/demand analyses are second to none, and who believes that gold from the US reserves has been coming into the market for several years.

Without telling him about my analysis of the ESF balance sheet, I asked him how much gold he thought came out of the Treasury/ESF in 1998 and 1999 in total. His response was 1,000 tonnes, a mere 25 tonnes difference from what I deduced from the ESF financial statements. When I told him this, that we had both reached the same conclusion from different sources, he chuckled but was not in the least bit surprised, being so convinced that the Treasury/ESF has been a major source of metal for years. I have thoroughly reviewed his supply/demand numbers since 1994 and have determined that as much as 2,000 tonnes of gold from the US reserve may have entered the market in order to make the gold price as low as it is, which leads me to the second tidbit that I would like to share with you. It is just as intriguing.

This same individual told me several months ago about some astonishing intelligence he had learned from a source in Europe. He told me that the Bundesbank’s gold vault was empty, which seemed so preposterous that I found it hard to believe. He also admitted that this news startled him when he learned about it, and that he did not have an adequate explanation for it. He knew that the Bundesbank was an active lender of gold, but he had a difficult time accepting the possibility that all 3,400 tonnes that it owned had been loaned. Yet he was confident that his source had provided him with accurate information.

We now know what has happened. The Bundesbank has loaned 1,700 tonnes, one-half of its 3,400 tonnes reserve; the other 1,700 tonnes were swapped for gold in the US reserves, requiring the change in the West Point vault from Gold Bullion Reserve to Custodial Gold. In other words, the Bundesbank’s vault is empty because one-half of their gold is stored in West Point not Europe, and the other half has been loaned out.

Despite the irrefutable proof that the ESF is involved in the gold market, two questions remain unanswered. First, what’s the ESF’s motive? Unfortunately, we just don’t know for certain.

Many, including me, claim that it is to use gold to provide the liquidity needed to bailout some big banks that have imprudently grown their gold books by recklessly expanding credit and mismatching their asset/liability maturities. These banks are the ones with the unusual ­ some say abnormal ­derivative activities that are named as co-defendants in Reg Howe’s suit against the BIS. That this list includes Germany’s largest bank may explain why the Bundesbank would agree to participate in this gold swap scheme. It was bailing out one of its own.

If logic prevailed, the US government would have learned from its ill-fated attempt in the 1960’s to keep the price of gold abnormally cheap at $35 per ounce that the market determines gold’s value. But instead, the US government is about to learn that it cannot keep a manipulated ‘floating-rate’ gold price from rising any more than it was able to keep the manipulated ‘fixed-rate’ gold price from rising thirty years ago. The free-market rate of exchange between dollars and gold will prevail, eventually repeating today what happened in the 1970’s after the artificially low $35 rate was no longer tenable ­ the gold price will skyrocket higher. It is well worthwhile keeping in mind that the gold price rose nearly three-fold in the eighteen months after the fixed-rate price was abandoned in August 1971.

Then there is the second unanswered question. To what extent is today’s exceptionally low gold price the responsibility of certain bullion banks, which have cheapened gold by extending gold credit to such an extreme, and the ESF, by perpetuating this scheme? This question too does not have an answer, at least not yet. But as the truth about the ESF’s involvement in the gold market continues to emerge and become more widely known, the price of gold is destined to rise to a more normal level, just like it did after August 1971. The high price that gold eventually achieves will indicate how badly certain bullion banks and the ESF have damaged gold mining companies and the gold industry.

In conclusion, while we don’t know whether any of these motives for manipulating the gold price that I ascribed to the US government are accurate, one point is clear and cannot be denied. The US government cannot claim that the ESF is not involved with gold. We now have the irrefutable proof that establishes beyond any reasonable doubt that the ESF is indeed involved in the gold market. We know this for a fact because of our peek behind closed doors.

Here is another interesting article on the The Visible Hand of Uncle Sam.

A statement cited previously may shed some light on the situation. When John Crudele quoted Norman Bailey as confirming government stock market activity in 1987, 1989 and 1992, he also wrote that according to the former National Security Council economist, “the explanation given to the brokerage firms is that the buying is for foreign clients, perhaps the central banks of other countries.” Just who might have provided such an explanation? One person who could do it convincingly would be the New York Federal Reserve official in charge of the System Open Market Account. As Auerback notes, this official’s responsibilities include “the management of the Exchange Stabilization Fund (ESF) and… the foreign custody accounts held at the NY Fed.” Recall Crudele’s information “that in the early 1990s [the ESF] was secretly used to bail the stock market out of occasional lapses.” A reasonable scenario then unfolds: The person who placed the orders for futures contracts evidently told the firms that the buying was for foreign clients. This would have been believable, given one of the New York Fed official’s responsibilities. But such an explanation would have conveniently masked the true buyer, which likely was the Exchange Stabilization Fund.

A Treasury-Fed Split?

The Fed’s denial of stock market activity, combined with claims that the Treasury controlled ESF did intervene, is intriguing when considered in the context of two 1995 Federal Open Market Committee transcripts. At the January 31 meeting, St. Louis Federal Reserve President Tom Melzer expressed concern about the Fed’s proposed participation with the Treasury in the bailout of Mexico then under discussion. The Clinton administration had decided to use the ESF to fund the rescue when Congress refused to grant an appropriation. Melzer worried:

In effect, one could argue that we would be participating in an effort to subvert that will of the public, if you will. I do not want to be too dramatic in stating that. This could cause a re-evaluation of the institutional structure of the Fed in a very fundamental and broad way.35

To which Greenspan cryptically, yet ominously, responded:

I seriously doubt that, Tom. I am really sensitive to the political system in this society. The dangers politically at this stage and for the foreseeable future are not to the Federal Reserve but to the Treasury. The Treasury, for political reasons, is caught up in a lot of different things. [Emphasis added.]

At the March 28 meeting, FOMC members again expressed hesitation about the Fed’s planned participation with the Treasury in the Mexican package. Once more, Greenspan attempted to alleviate any fears, but also noted:

We have to be careful as to precisely how we get ourselves intertwined with the Treasury; that is a very crucial issue. In recent years I think we have widened the gap or increased the wedge between us and the Treasury…. In other words, we have gone to a market relationship and basically to an arms-length approach where feasible in an effort to make certain that we don’t inadvertently get caught up in some of the Treasury initiatives that they want us to get involved in. Most of the time we say “no.” [Emphasis added.]

These passages obviously suggest that by 1995 the Treasury was engaging in activities that Greenspan deemed politically dangerous and, accordingly, with which he was very reluctant to be associated. It is only logical that these actions had not been disclosed publicly by the time he made these two statements. Had they been public, the Treasury would have already suffered the consequences of the political dangers of which Greenspan spoke.

Greenspan revealed what looks to have been a major split between the central bank and the executive branch of government. He spoke of having “widened the gap” between the Fed and Treasury, taking their relationship to a market-based one. This “arm’s-length approach” was likely the Fed’s attempt to preserve its credibility if the Treasury’s initiatives resulted in a political storm. Whatever Treasury was up to sounds rather questionable, judging by Greenspan’s explicit statements about political dangers and also his implied worry that the central bank could “inadvertently get caught up in some of the Treasury initiatives that they want us to get involved in.” He seems to have fretted that even the appearance of the Fed’s participation in these activities could be politically toxic for a central bank that prides itself on independence. Precaution thus appears to have been the Fed’s approach when dealing with the Treasury. Of course, according to Greenspan, the Fed only said no to the Treasury most of the time, indirectly admitting that in at least some instances the central bank participated in the unspecified initiatives.

We do not know what these initiatives were and, indeed, Greenspan’s frustrating ambiguity suggests he was cognizant of the fact that his words were being recorded. So we are left to speculate. It’s a reasonable assumption that whatever the Treasury was doing was market-related. This likelihood is indicated by the Treasury’s apparent attempts to include the Fed in the initiatives. The central bank is not responsible for fiscal policy, so logically its only use to the Treasury would be to execute or participate in some market-related transactions. This is further corroborated by Greenspan’s comment that the Fed had moved to a “market relationship” where feasible with the Treasury. That statement suggests that the Fed had to conduct at least some of the initiatives on behalf of the Treasury.

At this point we return to the Exchange Stabilization Fund, which is controlled by the Treasury Secretary. According to the New York Fed’s website, “ESF operations are conducted through the Federal Reserve Bank of New York in its capacity as fiscal agent for the Treasury.” As a result, it is easy to see how the Fed could become entangled in questionable Treasury initiatives.

Speaking of such endeavours, at the January 31, 1995, meeting the Federal Reserve’s general counsel revealed that the ESF conducted previously undisclosed gold swaps, and, while not spelling out the crucial details, a close reading of the transcript suggests they were recent transactions. Six years later, in an apparent cover-up, that same lawyer would claim not to know of any such dealings. But gold was probably not the only area in which the ESF dealt covertly. According to Greenspan, as of 1995 the Treasury was caught up in not one or a few, but “a lot of different things.” While only speculation, it is certainly possible that the Treasury used the ESF for stock market interventions that the central bank deemed unnecessary. If so, the Fed would logically have been concerned that its participation could draw criticism if such a scheme were revealed. Whatever the case, the 1995 FOMC transcripts suggest that the Clinton administration left office having managed to keep politically dangerous revelations from leaking into the public domain.

The Plunge Protection Team article was not the last to hint at the government’s resolve to protect the market. In 1998, Crudele described another apparently well-orchestrated leak, this time revolving around the activities of the aforementioned Peter Fisher:

The Federal Reserve [or treasury] is just dying to admit that it has been doing brilliant – but alas, questionable – things to keep the stock market bubble inflated. A Wall Street Journal article on Monday is the closest the Fed has ever come to making this admission, although the newspaper apparently didn’t know what it was on to.

The Journal story was about the bailout of the hedge fund, Long-Term Capital Management, and how the Fed stepped in to save the day.60

The story gets interesting in the seventh paragraph, when it starts talking about Peter Fisher, the 42-year-old No. 2 man at the New York Fed, whose “official” job is running the Fed’s trading operation. [Remember, Fisher also manages of the Exchange Stabilization Fund (ESF) and foreign custody accounts held at the NY Fed as a member of the US Treasury]

“In that capacity, Mr. Fisher is the Fed’s [and treasury’s] eyes and ears on the inner workings of stock, bond and currency markets and is given a wide degree of latitude about deciding when certain events pose broader risks,” the article says.

“He begins most workdays at 5 a.m. by checking the status of overseas markets… and ends them 11 p.m. the same way. In between, Mr. Fisher SWAPS [Crudele’s emphasis] intelligence and rumors with traders and dealers from his office in the Fed’s 10th-floor executive suite that overlooks the trading floor he runs,” the piece continues.

As I pointed out in a previous column, the market has done some strange things in the wee hours of the morning, especially between 5 a.m. and 7 a.m., which ultimately affect how equities do in the New York market.

Crudele then asked of Fisher:

What exactly does he give to these traders and dealers he talks to at 5 a.m. in the morning? “Swaps,” which is the word the Journal reporter came away with, implies a give-and-take. What is Fisher, the second highest person in the New York Fed’s hierarchy giving to traders?

Just gossip? Or is Fisher giving away what Wall Street calls inside information.

“But Heller’s idea was different. He wanted a more direct approach, especially when the bond and currency markets were becoming uncontrollable…. Heller believed that in an emergency, the Fed should start buying stock index futures contracts until it managed to pull stocks out of their nosedive. Essentially, whenever there is heavy buying of these futures contracts it causes the underlying stock market to rise. The futures contracts can be bought cheaply; they are highly leveraged so you can get more bang for your buck, and they eliminate the need for a rigger to purchase, say, all 30 stocks that make up the Dow. Heller explained that the process was simple. And it is. The trouble is, the government never has had authority to rig the stock market.” [email from Bill King, March 11, 2003 –]

According to Hultberg, King says it was during the first quarter of 1990 “that massive S&P futures buying began to be used extensively by the trusted agents of the PPT.” Along these lines, after September 11, the Observer stated that the PPT had previously acted in the early 1990s. Furthermore, John Crudele wrote in a February 20, 1990, article that “the stock index futures markets were buzzing with rumors that Washington was putting pressure on big trading houses to give the market a lift.” This was mere months after Heller’s proposal and thus may represent the effective entrenchment of market intervention in U.S government policy. The 1987 and 1989 rescues confirmed by former National Security Council economist Norman Bailey, by contrast, would appear to have been ad hoc activities. These likely were implemented with official approval, but not yet firmly instituted as the government’s typical response to a market plunge.

A close comparison between this statement and the remarks of George Stephanopoulos on ABC is revealing. Stephanopoulos said the PPT included the “Federal Reserve, big major banks, representatives of the New York Stock Exchange and the other exchanges.” While not mentioning the PPT by name, John Mack reported that a meeting occurred after September 11 and apparently comprised “the firms… the New York Stock Exchange… the Federal Reserve, [and] the SEC.” Other than the SEC, the two lists are the same, suggesting that accidental leaks by the former presidential adviser and the CSFB chief executive have essentially confirmed the existence of a PPT that includes the private sector. Furthermore, the list provided by John Mack is exactly identical to one detailed by the Scotsman newspaper, where they claimed that the PPT includes firms as well as “members of the Securities and Exchange Commission, Alan Greenspan’s Federal Reserve Bank and NYSE chairman Richard Grasso.”

The fact that the publicly acknowledged Working Group and the unspoken PPT differ in their constitutions might explain a report from the U.S. General Accounting Office in 2000. It stated: “Agency officials involved with the Working Group were generally averse to any formalization of the group and said that it functions well as an informal coordinating body.” As formalization would no doubt restrict the ability of the Working Group to grant status to the private sector, the reluctance of government officials to do so is not surprising. Instead, the government has apparently used the publicized Working Group as clever cover for the activities of the Plunge Protection Team. This possibility is supported by press reports cited previously in which the Working Group and the PPT are referred to interchangeably.

The dollar’s miraculous recovery, apparently thanks to large Wall Street firms, provides a rare glimpse into recent market interventions by the U.S. government. Rather than intervene directly in the markets themselves, the U.S. central bank [acting on treasury’s behalf] evidently gave instructions to trusted surrogates who did the Fed’s bidding. Importantly, the Fed apparently did not merely provide instructions to each bank separately. Stephanopoulos stated that at the time of LTCM’s collapse, “all of the banks got together” to prop up the currency markets.” This was clearly a collaborative effort.

The LTCM revelation is also significant because it indicates that the Plunge Protection Team isn’t merely concerned with the stability of the stock market. Supporting this, a report cited earlier from the Scotsman newspaper stated that in the aftermath of September 11, the PPT would “also attempt to deflect any pressure on commodity markets.”

Taken together, these revelations demand a radical revision of prevailing beliefs about the current state of markets, not to mention the relationship between the private sector and the U.S. government. If major financial institutions are knowingly implementing government policy with regards to important markets, they have essentially become de facto agencies of the state. Just as importantly, the government’s role has also changed markedly. Previously content not to intervene in certain spheres, now the Fed and Treasury apparently regard the stabilization of markets to be within their responsibilities.

The continuing silence of government officials about this expanded reach is easily explained. First, they no doubt recognize that an electorate supportive of free markets would frown upon market interventions. More pragmatically though, the government must also realize that to publicly acknowledge such activities would be to invite the greatest of moral hazard situations. To use a famous quote, the risks would be socialized while the rewards would remain privatized. Such a disconnect invites increasingly reckless speculation by investors who believe that the government stands ready to rescue them should crises arise.


Given the available information, we do not believe there can be any doubt that the U.S. government has intervened to support the stock market. Too much credible information exists to deny this. Yet virtually no one ever mentions government intervention publicly, preferring instead to pretend as if such activities have never taken place and never would. It is time that market participants, the media and, most of all, the government, acknowledge what should be blatantly obvious to anyone who reviews the public record on the matter: These markets have been interfered with on numerous occasions. Our primary concern is that what apparently started as a stopgap measure may have morphed into a serious moral hazard situation, with market manipulation an endemic feature of the U.S. stock market.

We have not taken a position on the wisdom of intervention in this paper, largely because exceptional circumstances could argue for it. In many respects, for instance, the apparent rescue after the 1987 crash and the planned intervention in the wake of September 11 were very defensible. Administered in extremely small doses and with the most stringent safeguards and transparency, market stabilization could be justified.

But a policy enacted in secret and knowingly withheld from the body politic has created a huge disconnect between those knowledgeable about such activities and the majority of the public who have no clue whatsoever. There can be no doubt that the firms responsible for implementing government interventions enjoy an enviable position unavailable to other investors. Whether they have been indemnified against potential losses or simply made privy to non-public government policy, the major Wall Street firms evidently responsible for preventing plunges no longer must compete on anywhere near a level playing field. It is most unfair that the immensely powerful have been further ensconced in their perched positions and thus effectively insulated from the competitive market forces ostensibly present in our society.

In addition to creating a privileged class, the manipulation also has little democratic legitimacy in the sense that the citizenry has not given its consent. This has tangible ramifications. By not informing the public, successive U.S. administrations have employed a dangerous policy response that is subject to the worst possible abuse. In this regard, the line between national necessity and political expediency has no doubt been perilously blurred.

We can only urge people to see what the evidence indicates and debate what is and ought to be a very contentious matter. The time for such a public discussion is long overdue.


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