The GATA African Gold Summit

While the gold price appears to be calm and placid on the surface, powerful forces war behind the scenes in a life or death struggle to shape the gold market of the new millennium. The world gold markets are embroiled in a raging gold information war. The stakes are stupendously high, as the state of the gold market and the price of gold do not exist in a vacuum. Virtually every other important capital market in the world, from the mammoth currency foreign exchange markets to the critical international bond markets, is affected directly or indirectly by the price of gold.

Unlike past economic/financial wars, the current war on gold has not degenerated into actual physical conflict. At the dawn of the Information Age, this latest gold war is not being fought with Kalishnakovs and M-16s, but with fantastic new communication technologies centering around the wondrous Internet. It is, in many aspects, a perfect example of a true information war.

The currently raging gold info-war is a fight for free markets and for the hearts and minds of investors worldwide.

As in most epic conflicts, the combatants of this gold info-war are divided into two camps. The slogan of the first group of soldiers could be expressed in three words, "Gold IS dead!" The battle cry for the second group of warriors could be summarized as "Gold IS being suppressed and a price explosion is imminent."

The "Gold IS dead!" partisans can also be described as anti-gold forces. They believe that timeless financial lessons learned in the past do not apply anymore to our fantastically complex global economy. They believe that gold is a "barbaric relic", with no place in computerized and globally integrated financial markets. The anti-gold forces generally think that humanity has finally "tamed the business cycle" and a paper-based, derivatives controlled global financial system can continue to expand at rapid rates forever.

This camp believes governments and large private entities can control fiat currencies, markets, and wealth-creation indefinitely. The traditional role of gold as the monetary base and ultimate asset is thought to no longer be necessary by the anti-gold forces because systemic risk has been mitigated through the light-speed, 24/7 global financial infrastructure humankind has collectively created. Through the proliferation of derivatives, the anti-gold forces believe risk can be bought and sold until the markets as a whole never experience a boom bust cycle. With the seductive prospect of no future economic/financial earthquakes, the anti-gold forces believe there is no need for the ultimate rock of financial security, fire-tested through millennia of human history_ gold.

Standing in the other corner are the allies of gold.

The pro-gold forces are small in numbers but ferocious in resolve. They believe that financial history DOES matter, and that gold will always have the same critical role as the cornerstone of the financial world that it has maintained virtually uninterrupted for six thousand years. The pro-gold forces are generally students of economics, history, finance, and money. They have vicariously witnessed past financial manias and past attempts to cast gold out of the financial system through the eyes of people who lived through these past historical episodes. The pro-gold partisans recognize that markets move in cycles and trends always change. They also realize that the human heart, the ultimate source of greed and fear that drives booms and busts, also changes not through history.

Many of the pro-gold forces, after years of study, believe the world gold market is currently actively being suppressed by a few governments and elite private banks for selfish reasons. The governments are trying to cover up past policy failures and protect their 100% paper, backed by nothing but faith and trust, fiat currencies and overvalued equity markets. The private banks enthusiastically jumped into the gold manipulation game because borrowing gold at sub 1% lease rates and selling it provided a virtually endless supply of very cheap capital that could be invested in other markets at an enormous profit.

The pro-gold forces believe that after endless research and investigation over the last six or so years the case for a manipulated gold market is virtually unassailable. They note that the laws of economics are ironclad and irrevocable, and can only be cast asunder and bent for a relatively short period of time, as history has taught us over and over.

As the gold info-war rages on, there have been victories and defeats for both sides. Generally, however, the anti-gold forces seem to have the upper hand as gold continues to hover near 20+ year lows. The pro-gold armies, although they control miniscule amounts of capital compared to the governments and banks believed to be suppressing gold, make up for their disparity of resources with world-class research, a mastery of cutting-edge Information Age technologies like the Internet, unquenchable zeal, and undying tenacity.

Like any good local guerilla army fighting a much larger and better-equipped aggressor, the forces for free gold markets carefully choose their engagements.

The next major battle initiated by the pro-gold forces, and potential turning point in the gold info-war, occurs May 10, 2001 in Durban, South Africa. The Gold Anti-Trust Action Committee (GATA _ www.gata.org) is hosting an African Gold Summit where crucial evidence will be presented to important African governments, gold-mining companies, mining labor interests, and the media about what has transpired in the global gold market in recent years.

With the global physical gold market centered in London and the global paper gold derivatives market revolving around London and New York City, Durban may seem an unlikely battlefield for a potentially decisive confrontation in the gold info-war. It is actually a perfect location, however, as South Africa has critical strategic importance in the global gold trade. South Africa alone supplies around a quarter of the total mined global gold supply each year, with other African nations contributing more gold. At its peak production in 1970, South Africa supplied almost four-fifths of the annual mined gold supply. Gold mining is an extremely important strategic industry to the entire country and region, and the low gold price has exacted a devastating toll on the Africans.

The love of gold in South Africa runs deep, it is a crucial macro supplier of gold, and it has born the brunt of the bitter fruit of the anti-gold campaign. There is probably no better place in the world to hold a pro-gold, pro-free market conference that exposes damning evidence of what has really transpired in the global gold markets since the mid 1990s.

The line-up of warriors GATA is presenting is simply extraordinary, a veritable "Who's Who" of the gold world. Among the presenters include Bill Murphy, Frank Veneroso, Reg Howe, and James Turk. These are the all-stars and movers and shakers in the fight to liberate the world gold markets! It will be an incredible summit.

Bill Murphy is a founder and the Chairman of GATA. He has fought long and hard to illuminate gold market dynamics and to unshackle the gold market to trade free of government molestation. He has traveled to the US Congress to present the dangers of unprecedented growth in gold derivatives. He has spoken with gold producers, gold investors, and gold consumers all over the world. He is also the proprietor of the excellent award-winning contrarian website LeMetropole Cafe (www.lemetropolecafe.com).

With his high profile "four-star general" position in the pro-gold forces, Mr. Murphy has extensive global contacts and one of the best gold intelligence gathering networks on the planet. He is one of the most "plugged-in" individuals in the world gold market.

Murphy has been commenting lately to his clients on the unnatural tightness in the physical gold market. He points out that sky-high gold lease rates in recent months indicate that physical gold available for lease is becoming harder and harder to come by. He has also been carefully monitoring the deteriorating situation in the gold derivates market centered around the NY COMEX. Physical gold inventories to settle futures contracts that demand delivery have plummeted from around 2.0m ounces at the beginning of the year to around 0.8m in early May. Although one wouldn't know it from the perpetually anti-gold propaganda spewed out by the conventional financial media, it appears there are serious structural problems in the global gold trade percolating menacingly right below the surface.

Murphy will no doubt present much more information in Durban about the current state of the world gold markets. It will be a real eye-opener for conference attendees who rely on the mainstream media which is hopelessly disseminating disinformation on gold. As Murphy also probably has many private sources that provide highly valuable gold market intelligence on specific gold market happenings, there is also the possibility that he has an ace or two up his sleeve to throw down for the African governments and gold producers.

Frank Veneroso is also presenting in Durban. Mr. Veneroso has been studying the global financial markets for decades and his reputation for gold market analysis is unparalleled. He has consulted for governments and mega-financial entities around the world, and his services are always in demand. He has also presented data to the US Congress on the danger inherent in explosive and massive gold derivatives growth. He runs a renowned global consultancy, Veneroso Associates. Veneroso has been studying gold supply and demand dynamics for decades.

As the GATA Gold Summit is by invitation only for elite African gold players, we are fortunate that Mr. Veneroso was kind enough to post a preview of his presentation on the Web. It is located at www.gata.org/veneroso_presentation.html and is highly recommended reading. Veneroso's findings in this preview are simply amazing and could alone rock the gold world to its very core.

As everyone from a professor of economics to a child setting up a corner lemonade stand knows, prices in free markets are determined by supply and demand. If supply EXCEEDS demand, prices fall to increase demand and lower supply until a market clearing equilibrium point is reached, where supply exactly meets demand. If demand EXCEEDS supply, however, just the opposite happens in free markets. Prices rise to retard demand and entice additional production online until supply equals demand at a new market clearing equilibrium price. These simple thoughts are literally THE foundation for free markets and economics. Although the immutable laws of supply and demand have been briefly bent historically, no force has ever been able to repeal these laws on a macro scale for a prolonged period of time.

Veneroso begins his web presentation preview by outlining consensus estimates of global gold supply and demand, which point to global annual gold demand exceeding global annual mined gold supply by 1500 tonnes, or 60%, each year. He moves on to present his own firm's conservative estimates, which put the annual deficit at much more dangerous levels, over 2200 tonnes, around 90%. The vast majority of the annual gold shortfall is made up by sales and loans of gold from Western central banks. If those sales are interrupted for any reason, or if the gold market finds out the banks are running out of gold to dump, the gold price would roar heavenwards immediately as artificial marginal supply from central banks shrivels up.

Veneroso also examines the total gold loan (gold short) position, which he and his people believe is 100% to 200% greater than the 5,000 tonne conventional consensus estimate. He goes on to outline reasons why the official data on gold provided by certain London-based organizations is likely to be incorrect. At the GATA African Gold Summit he will outline these reasons in detail as well as present the sources and basis of the stunning Veneroso Associates analysis of the global gold market.

At the end of his preview slides, Veneroso notes that there are approximately only six years of central bank gold stocks remaining. This number is amazing as the anti-gold forces have continually led the markets to believe that there are decades and decades of gold reserves left that central banks will sell into the market.

Overall, the impression Veneroso's preview leaves is that the Veneroso Associates' carefully researched and documented analysis on the economic realities of the gold market is going to be explosive. The African attendees will realize that the anti-gold campaign has been weighed in the balances of free markets and found wanting. If the gold short position is indeed this large and the central banks are burning through their gold hordes this fast, the potential implications of Veneroso's research are staggering. A man who needs no introduction in the gold world, Reg Howe, will also present in Durban on May 10. Mr. Howe, of course, is the gentleman who launched the incredible legal action against the Bank for International Settlements, Alan Greenspan, and other elite anti-gold players on December 7, 2000. Mr. Howe is the proprietor of Golden Sextant, an internationally renowned website located at www.goldensextant.com which discusses money, politics, economics, and gold. He is a brilliant attorney who has been studying and analyzing the gold market for decades. Since he filed his complaint, he has probably been more responsible for keeping the anti-gold forces awake at night dripping in cold sweat and fear than any other individual on the planet.

The Howe v. BIS et al case is tremendously important. We wrote an earlier essay explaining it entitled "Let Slip the Dogs of War". Basically, the complaint contends the defendants in their operations in the gold market have knowingly violated pillars of US law including the United States Constitution, the Sherman Anti-Trust Act, and the Securities Exchange Act of 1934. Howe also contends that some defendants committed common-law fraud. Howe's original case, as well as his response to the expected Motions to Dismiss by the defendants, is available for free quick and easy download in Adobe PDF format at www.zealllc.com/howepla.htm . Both documents are extraordinary and absolutely essential reading for understanding the current gold info-war.

In his recently filed response, Howe carefully laid out his arguments and the legal foundations on which his claims rest. One of the most spectacular parts of the document, however, is the revelation of Howe's discovery in official United States Federal Reserve meeting minutes that the secretive slush fund of the US Treasury, the Exchange Stabilization Fund, is apparently actively intervening in the gold market.

The Exchange Stabilization Fund, created in 1934 and funded with the filthy proceeds of Socialist President Franklin Roosevelt's robbery of private gold from the American populace, is not accountable to the United States Congress. The US Secretary of the Treasury has direct control over the ESF and he reports exclusively to the President of the United States. The ESF has been used for stealthy and covert interventions in various world markets, usually currencies FOREX, for many decades.

In early 1995, major American money-center banks were facing large losses on loans they made to Mexico. The Clinton administration made the decision it wanted to bail the elite banks out, effectively back-stopping their silly bets. Clinton's market manipulating crew ran up against a brick wall when they tried to talk the US Congress into using taxpayer money to bail out the fat cat bankers who had made risky loans in Mexico, however. Congress rightfully refused, realizing that the only way capitalism can work is if traders, both big and small, fully bear all the risk of their positions themselves. Without risk, there is no capitalism. Back-stopping the trades of big US banks only encourages them to act more aggressively in the future and introduces a MONUMENTAL moral hazard problem.

With Congress saying "NO WAY!", Clinton's cronies explored their options to make an end-run around the will of the US people as expressed by our elected representatives in Congress. They came up with the idea of using the ESF to bail out their banker friends since it was not accountable to Congress and operated outside of normal oversight authority.

In the Federal Reserve meeting minutes from January 31, 1995, there is a discussion exploring the legality of this option. Federal Reserve Board Governor Lawrence Lindsey is uncomfortable with circumventing Congressional will with the ESF. In order to allay his fears, the Fed's General Counsel J. Virgil Mattingly replied and told him about the broad authority of the ESF statute. As an example of this authority, Mattingly mentioned the ESF "gold swaps", and apparently everyone in the room understood the example as no one asked questions.

This is an inflammatory revelation because the US Treasury has officially DENIED, to everyone from US Senators to American citizens to the US federal court system, that the ESF has been involved in gold or gold derivatives since 1978. Every communication from the US Treasury on the subject explicitly and forcefully states the ESF is NOT involved in the gold market. Many in the pro-gold community, however, believe the ESF has been used to actively sell gold into the market to stamp out fledgling gold rallies in the last six years. The disclosure of gold involvement by the ESF in a 1995 Federal Reserve meeting is very important and has tremendous implications.

Reg Howe will likely discuss the new evidence of US government involvement in gold price suppression as well as legal issues surrounding his landmark complaint against the gold shorts in his presentation in Durban. It is sure to be full of startling and disturbing revelations for the African gold community.

James Turk will also be presenting at the GATA African Gold Summit. Mr. Turk is a world-renowned financial market expert and has also consulted for governments and private clients around the world. He publishes the famous Freemarket Gold & Money Report (www.fgmr.com), a prestigious international financial newsletter, for his clients. Turk has lived and worked around the world and has studied the gold markets in far corners of the globe firsthand. He is also a member of Howe's Discovery Committee to review documentation obtained from the Howe v. BIS et al defendants in the discovery stage of the case.

Turk has recently written some amazing must-read essays on gold detailing his original research and also spring-boarding off other analysts' findings to arrive at startling new conclusions. He wrote "The Smoking Gun" on December 11, an outstanding analysis detailing US ESF involvement in the gold market by analyzing discrepancies in official US Treasury and US Federal Reserve reports on US gold holdings. Just recently, in late April, Turk published another essay that has far-reaching and enormous implications.

In "Behind Closed Doors", Turk further analyzes the revelation that Reg Howe discovered in the Federal Reserve official meeting minutes on ESF involvement in the gold market. Turk analyzes that development, explains what the development means, but also integrates some other analytical work to arrive at a stunning conclusion.

Michael Bolser, another outstanding gold market analyst on Reg Howe's Discovery Committee with Turk, had been looking through official US Treasury records on United States gold inventory levels. Bolser noticed that in September 2000 one of the primary US physical gold reserve storage points, the US Mint in West Point, New York, had mysteriously switched the status of 1700 tonnes of gold (over 20% of the entire US gold reserves) from "Gold Bullion Reserve" to "Custodial Gold Bullion". Now, as everyone knows, to be a "custodian" over something means that you do not own it, but are maintaining it for its true owner. Even more ominous, there was no change in the "Gold Bullion Reserve" status at all the other US mints. Something odd was obviously up. Bolser wrote the US Treasury to seek clarification on the cryptic status change of 1700 tonnes of gold, but received no reply.

Turk, in "Behind Closed Doors", builds on Bolser's research and adds his own explorations of Federal Reserve records to come to the incredible conclusion that the ESF has covertly encumbered over 20% of the American citizens' public gold bullion. This is far beyond scandalous as any changes in US gold reserves require US Congressional approval, which has definitely not been granted.

Turk drilled down even further and makes the case that a gold swap of 1700 tonnes may have been executed with the German central bank, the Bundesbank. This would enable the US ESF to stealthily dump physical gold into the crucial European physical gold market directly from Germany without transporting the gold physically from the US, which would cause all sorts of alarm bells to ring in political, economic, geopolitical, and financial circles. Turk makes the case that the Bundesbank now owns 1700 tonnes of formerly US gold on US soil and that the Bundesbank's gold vaults themselves are at least half empty and may even be completely gutted. The potential fallout from this allegation, if proven true, will be mind-boggling in both America and Germany.

Like Murphy, Turk has an extensive network of professional gold contacts around the world and his presentation at Durban is sure to be amazing.

We have not even mentioned all the speakers at the GATA African Gold Summit in this brief synopsis! It will be an extraordinary event in modern gold history.

This critical battle in the gold info-war that will be fought on the African front in Durban on May 10, 2001 could prove to be a decisive turning point in the war. African governments and African gold producers will learn firsthand what the pro-gold forces have uncovered and exactly how the anti-gold forces have destroyed the gold-mining industry and the economies of the African nations that depend on their abundant blessings of natural resource wealth. Formerly highly secretive events of the gold world will be laid naked for the Africans to see what has transpired.

Unlike the average private contrarian gold investor, these African countries, mining companies, and labor interests, along with the media, ARE in a position where they can make an immediate, tangible difference and turn the tides in the raging gold info-war.

The African governments present at the conference can immediately begin ending the great anti-gold game by publicly and forcefully questioning the US and British governments about their trading activities in the gold market. Tough questions need to be asked. The US Congress, for instance, has been very supportive of the post-apartheid South African government. What if the Clinton administration, contrary to stated US policy towards South Africa, secretively unilaterally bombed the gold market bypassing Congressional oversight and wishes? The African gold mining nations have a right to know if the elite big money anti-gold forces have raped them of their natural resource wealth by aggressively applying artificial supply augmentation to the global gold markets to drive down gold prices far below the cost of production.

The actual gold mining companies themselves can probably move the gold info-war to its endgame in a single trading day. All they have to do is jointly and publicly announce either a moratorium on all new hedging and forward sales and close out their existing hedges, which demonstrably depress the gold price, or else announce a pact to jointly limit production until the gold price climbs north of some arbitrary target, say US$500 per ounce. If the African gold producers that supply over a quarter of the annual supply of mined gold decide to force the hands of the anti-gold forces, the game is over and gold will be liberated. When all the voluminous evidence for official covert gold suppression is presented to these companies in Durban, they will likely be furious and may decide to act in a unified and public way that will rock the gold market to its foundations.

Finally, the world media covering the GATA African Gold Summit may finally recognize how huge this scandal really is. In US terms, if the GATA allegations of ESF involvement in the gold market since the mid-1990s are correct, we have a scandal rapidly approaching that DWARFS Watergate. Interestingly, a German film crew is planning to make a documentary at the Summit, so chances are the truth about the gold market will begin to see the light of day around the world. It is virtually impossible to manipulate a market when everyone knows you are doing it, as large speculators can throw a monkey wrench in the works and blow the operation sky high at will. If the media picks up this ball and runs with it, the great gold suppression game is also nearing its final agonizing gasps.

As the pro-gold forces continue the brave struggle to liberate gold from the command-and-control anti-free market schemes of the anti-gold forces, the GATA African Gold Summit is shaping up to be a highly important and potentially decisive battle in the raging gold info-war.

Adam Hamilton, CPA, MCSE
aka Zelotes
4 May 2001

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Mr. Hamilton, a private investor and contrarian analyst, publishes Zeal Intelligence, an in-depth monthly strategic and tactical analysis of markets, geopolitics, economics, finance, and investing delivered from an explicitly pro-free market and laissez faire perspective. Please visit www.ZealLLC.com for more information, www.zealllc.com/samples.htm for a free sample, and www.zealllc.com/subscribe.htm to subscribe.

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Minutes from Federal Reserve Bank Meetings

May 19, 1992

VICE CHAIRMAN CORRIGAN. Thank you, Dick. Governor Angell.

MR. ANGELL. I've always been very sympathetic to watching the monetary aggregates, and I believe that they really are a very [integral] part of our fundamental program against inflation.

But as you know. From time-to-time I have looked carefully at other means to determine whether or not there is a shift in demand for any one of the aggregates. And I've concentrated on commodity prices as probably being the most sensitive in showing whether or not monetary restrain truly is in place or whether [policy is] characterized by monetary ease. At the present time commodity prices, although they have the reputation of being very volatile, seem rather stable to me. If there's any trend it's probably slightly upward but not as strong as ordinarily would be seen in a recovery phase. So, on the surface that doesn't seem to show great inflation signals out ahead. Gold prices probably need to be looked at some, particularly since there are those who view the declining gold prices as [unintelligible] into growth rates. This thesis holds that M2 growth has been very slow and it shows up by following gold prices. I think it's important to recognize that gold is always [unintelligible] in regard to its monetary properties and for a long period of time gold prices were lower than market forces would have dictated due to the fact that many governments wanted to sell out their gold stocks.

Consequently, gold stayed in the ($340) range a lot longer than it otherwise would have. Costs of production in many places in the world were way above that, and so there was no technology going into that industry. When gold prices are running up so the optimists believe the price is going to be in the $500 range, then you get a surge of technology into that industry. And it seems to me we're experiencing the impact of that surge. Indeed, the surge has been primarily a U.S. surge. In the United States, we've had during the 1980s over $8 billion of investments in gold mining, just as an example of what technology can do when the price outlook is favorable. That has resulted in a very quick [advance] for the United States from nowhere in the park of gold producers to the number 2 position. Indeed, production in the United States is now above 60 percent of that in South Africa and very well could exceed South African production before the decade is over. A new technology involving heat-bleaching means that the cost of production with that new technology runs closer to $250 an ounce rather than to $350 an ounce. When you look at what is happening in Chile and other areas around the world, it looks as if this same technology probably is catching on in other places. One would then expect the price of gold to fall closer to its cost-of- production in the marginally efficient areas. I give this explanation I suppose partly because I've begun to receive "hate mail" [accusing me1 of having been unresponsive to falling gold prices and [saying that I] should have been an advocate of monetary ease based upon that.

CHAIRMAN GREENSPAN. How did you answer the question?

MR. ANGELL. Well, I answered the question by saying that I have never supported $350 an ounce gold: people just think that I do.

MR. LINDSEY. I thought it was in support of gold $10 below wherever it is now!

MR. ANGELL. I see. Well, it's all right to be in that direction. It seems to me that we ought not let the current information on inflation, disappointing as it is, cause us to move to precipitate action. It seems to me that sound money is something we accomplish over a long period of time. But it does suggest to me that the level of restraint that's out there is probably not as great as many have thought it to be and that we do need to be in a posture of maintaining constant restraint over time until we get the producer price index numbers behaving better than they're behaving. There's no reason for us not to get inflation in the goods sector quickly down to zero. And I think if we maintain the kind of posture that's needed, that will occur. I do think there will be a time lag between [that and] the adjustment of inflation in the services sector to zero.

Feb 2, 3 1993M

If you would turn to Chart 6 in the Financial Indicators package that Don has provided as he always does--I was mistaken in thinking the charts were missing from the other document because they're always in this document--you will see on that bottom chart for all commodities ex-food and ex-oil a price move that is somewhat of a preliminary indication of what happened at the end of 1982 and what happened in 1987. I don't have the courage to vote to tighten at this point, Mr. Chairman, because I'm hopeful that this will get reversed. And the price of gold being--

CHAIRMAN GREENSPAN. How much is lumber in there?

MR. ANGELL. Well, lumber was up 43 percent year-over-year the last time I looked.

CHAIRMAN GREENSPAN. And it jumped to the limit in the last two trading sessions.

MR. ANGELL. Yes, but of course the beauty of this experimental ex-food and ex-oil commodity index is that it's not a [unintelligible] phenomenon with lumber; it [measures] actual house construction that is moving up and increasing demand; and it provides an indicator not only of price levels but also of real economic activity. Now, if you look at the top chart on all commodities, which is the best predictor of CPI inflation, oil's decline and the behavior of food prices do not worsen the inflation outlook.

July 5, afternoon session

CHAIRMAN GREENSPAN. President Jordan.

MR. JORDAN. peter, I want to follow up on what you said about Mexico, because something went by me awfully fast there. YOU said the Treasury has monetized SDRs to fund the Mexican drawing. Can you explain that a little?

MR. FISHER. One of the resources of the ESF is SDRs. The process of monetizing them and presenting them to us--let me say if I am explaining something wrong, Sandy, please bail me out--we take them in and they get dollars for them. And that is the major--

MR. TRUMAN. They sell us SDR certificates.

MR. FISHER. They sell us the SDR certificates; they get the dollars and we have the SDR certificates. That then is an injection of liquidity that we have to worry about and sterilize as we would any other form of intervention in that sense. So, that's the process of providing them dollars: monetizing the SDRs.

MR. JORDAN. But we, the twelve Federal Reserve Banks, own our respective shares of these SDR certificates based on the capital of our banks?

MR. TRUMAN. Right.

MR. JORDAN. HOW are we informed that we own them? How is my bank informed that we now have that in our portfolio?

MR. KOHN. It's published on the weekly H.4.1 statement; I don't know whether there is a separate internal notification. There already are $8 billion of special drawing rights outstanding in addition to the $11 billion of gold stock.

CHAIRMAN GREENSPAN. I think President Jordan is asking whether somebody is going to call him up and say "You have just become the proud possessor of an increased amount of SDR certificates." He is asking: "What's on my bank's liability side?"

MR. FISHER. Initially, it would--

CHAIRMAN GREENSPAN. Unless the New York Bank is holding them all and the increase is offset by deposits at the Fed wholly in New York--

MR. TRUMAN. The Treasury balance goes up.

MR. FISHER. The mathmatical way is that the Treasury balance goes UP, as we are all saying. That's the narrow answer. But the Chairman is asking--

MR. KOHN. And then we sell government securities, as they draw down the balance.

CHAIRMAN GREENSPAN. That's not the question I am asking. If the liquification were wholly an issue of the Federal Reserve Bank of New York taking onto its books an SDR certificate and crediting the Treasury account for the $2 billion, then the transaction is complete and the Cleveland Bank goes its merry way and nothing happens. I think the question is: Are any of those certificates going to show up throughout the System and what are the transactions on the liability side and against whom--the New York Bank, the Treasury, or what?

MR. KOHN. The current SDRs are distributed throughout the System the way every other asset is.

MR. FISHER. I may be missing the point, but in terms of the System Open Market--

CHAIRMAN GREENSPAN. No, the point is that the liquification--

MR. TRUMAN. What's on the liability side?

CHAIRMAN GREENSPAN. The Treasury takes its SDR certificate, gives it to the Federal Reserve, which simultaneously places the SDR certificate on the asset side of our consolidated balance sheet and increases the Treasury deposit on the liability side. -That's what happens to the consolidated system. President Jordan is asking what happens among Federal Reserve institutions? If you are going to allocate SDR certificates to the various Banks, then what appears on the liability side? Are we creating a deposit for the Treasury on all twelve Banks? Is it a transfer from the Federal Reserve Bank of New York? What actually is done?

MS. MINEHAN. It's done through the inter-District settlement account.

MR. KOHN. It could be the inter-District settlement account; Cathy says it is. But the other point, Mr. Chairman, is that that deposit never shows up. The Treasury knows in advance that it is going to get $2 billion. It doesn't call $2 billion of funds in from the commercial banks. So, the Treasury deposit is $5 billion or $7 billion or whatever it is the Treasury is targeting that day.

CHAIRMAN GREENSPAN. This has nothing to do with commercial banks. This is basically a Federal Reserve crediting of the Treasury account for the amount of the SDR certificates.

MR. KOHN. Right. Then the Treasury doesn't call in the funds. The Treasury's account--

CHAIRMAN GREENSPAN. No, the Treasury then disburses those funds to Mexico.

MR. KOHN. On the same day.

VICE CHAIRMAN MCDONOUGH. Wouldn't we just have a change of assets on the balance sheet?

CHAIRMAN GREENSPAN. Yes. In other words the check is then drawn on the Treasury account, if you want to put it that way, and will end up in the Fed account for foreign central banks, or whatever we do with it.

MR. KOHN. Maybe.

VICE CHAIRMAN MCDONOUGH. But on the Cleveland bank's account their share of SDRs goes up and another asset goes down, right?

MR. KOHN. That other asset is Treasury securities that Peter sells to offset the increase in SDRs.

VICE CHAIRMAN MCDONOUGH. That's what happens to Cleveland's balance sheet.

MR. KOHN. And it happens the same day. The Treasury's balance at the Federal Reserve never changes, whether the SDRs are issued or not. They target that at a given number: they know in advance what it is. They don't raise cash; they don't sell bills.

VICE CHAIRMAN MCDONOUGH. So ceteris oaribus, the total on Cleveland's balance sheet stays the same? SDRs go up and Treasury securities go down.

MR. JORDAN. You sterilize immediately so that our share of the Treasury portfolio goes down by the same amount at the same moment?

MR. KOHN. Right.

MR. TRUMAN. If I could just add one other factor--

CHAIRMAN GREENSPAN. I'm still not sure I understand this transaction.

MR. FISHER. We will endeavor to have a simplified--

CHAIRMAN GREENSPAN. We still haven't discussed how the money gets to Mexico. where it is, and who draws the check. It's an interesting issue that I will reraise outside of this meeting, unless somebody needs to know. Maybe you already understand all this.

MR. TRUMAN. One more fact is that this is a case in which the Federal Reserve has no choice as to whether it accepts SDRs.

CHAIRMAN GREENSPAN. I understand that.

MR. TRUMAN. In a lot of other transactions with the Treasury, the Federal Reserve has some choice. But the law says, I think, that the Secretary of the Treasury may issue SDR certificates and the Federal Reserve shall accept them. Period.

CHAIRMAN GREENSPAN. Do we shift U.S. Treasury securites from our account to Mexico? Never mind!

MR. FISHER. We will endeavor to clarify it for all interested parties.

CHAIRMAN GREENSPAN. President Melzer.

MR. MELZER. Actually, I had a related question. I was curious about the same thing Jerry raised. Do we end up with an earning asset? Is there a way to earn anything on the SDRs that we hold or is that, in effect, a nonearning asset?

SPEAKER(?). It's nonearning.

MR. JORDAN. We reduce our earnings. When you're clarifying this, another question is: This is a repurchase agreement, right?

MR. TRUMAN. NO. It's outright.

SPEAKER(?). It's an outright purchase.

MR. TRUMAN. Like gold certificates, it's an outright purchase; there are no repurchase agreements on the gold certificates. They are required to redeem them under some circumstances.

MR. JORDAN. This differs from my understanding, then, because in February or March or whenever, my understanding when we were going to take yen or deutschemarks--

MR. FISHER. That would be warehousing.

MR. TRUMAN. That's warehousing.

MR. JORDAN. You are saying this is not warehousing, this is not a repurchase agreement? So, this is permanent.

MR. MCDONOUGH. correct.

MR. TRUMAN. Permanent, yes.

MR. MCDONOUGH. It's an acquisition of an asset, not a swap.

MR. JORDAN. I didn't know that.

CHAIRMAN GREENSPAN. Any further questions for Peter? President Moskow.

MR. MOSKOW. This is on another subject.

MR. FISHER. I want to thank you!

MR. MOSKOW. peter, I was on the "morning call" this morning and one of the subjects was the fed funds futures rate. My recollection from this morning was that the fed funds futures rate is now indicating a 60 or 65 percent probability of a 25 basis point cut in the fed funds rate this month. I was just wondering how that ties in with what you were saying here this morning.

MR. FISHER. I think we heard the same thing from the same sources at different times this morning. Looking through the pricing of the contract and the different time horizons one has to adjust for, there is a 60ish percent probability, if you read it literally, of a move early in the month--meaning now. And there is an implied probability closer to 100 percent of a 25 basis point easing by the end of the month. Without going too far into the gymnastics of it, that's how one interprets 14 basis points on a contract that settles near the end of the month, given the different probabilities and different time horizons.

MR. MOSKOW. But I thought I heard you saying that the majority of the opinion in the market was that there would not be a move.

MR. FISHER. Yes. I was trying to offer a note of caution about whether you should read that price literally as saying that everyone in the market has agreed that those are the probabilities attached to a move or whether it's a clearing price between some who have a much higher sense of confidence that there will be a move earlier in the month and others who don't think there will be a move this month at all. There is room for all sorts of interpretations as to whether a given basis point implication in the fed funds contract indicates a consensus view or a range of different views that find a clearing price.

CHAIRMAN GREENSPAN. I think I've got it! [Laughter] YOU are telling me that the SDR certificate comes out of the Treasury and we cancel the Treasury obligation and it is wholly an asset swap so that the debt to the public of the U.S. Treasury goes down by that amount. Is that what happens? That solves President Jordan's problem too! [Laughter]

MR. JORDAN. Can I follow up on that? The same thing happened when we changed the price of an ounce of gold from $35 to $38 and then to $42.22. The Treasury got a windfall of about $1 billion to $1.2 billion in both of those so-called devaluations. So an issue on this is: What was the dollar price of SDRs that we monetized? YOU say I have an asset on my balance sheet and I don't know what the value of it is.

CHAIRMAN GREENSPAN. It's about $42.

MR. TRUMAN. It's $42.22; it's equivalent to the official price of gold.

MR. JORDAN. We do this at the official U.S. Treasury price of gold?

CHAIRMAN GREENSPAN. Do you mean that we can lower the debt to the public by moving the price of gold up to the market price?

That could cut the debt back by a not insignificant amount!

MR. JORDAN. I have been trying not to mention that publicly for fear that someone might want to do it.

CHAIRMAN GREENSPAN. It's probably too late; we just mentioned it.

MR. JORDAN. It will become known five years from now!

MR. LINDSEY. Five years from now, it will be read in the transcript for this meeting.

MR. BLINDER. By which time it already will have been done.

CHAIRMAN GREENSPAN. Any further questions for Peter? If not, would somebody like to move to ratify the foreign currency transactions during the intermeeting period?

-END-

Dave
SHIPDIVING@aol.com

From IMF website:

As of October 31, 2000, the IMF held about 103 million ounces (3,217 metric tons) of gold at designated depositories. The IMF's total gold holdings are valued on its balance sheet at SDR 5.9 billion (about $7.5 billion) on the basis of historical cost. Valued at current market prices, the IMF's holdings amount to some SDR 21.4 billion ($27.4 billion). The Articles of Agreement limit the use of gold in the IMF's operations and transactions. Transactions in gold by the IMF require an 85 percent majority of the total voting power in the IMF. The IMF may sell gold outright on the basis of prevailing market prices; it may accept gold in the discharge of a member's obligations to the IMF at an agreed price on the basis of prices in the market at the time of acceptance. The IMF does not have the authority to engage in any other gold transactions, e.g., loans, leases, swaps, or use of gold as collateral, and the IMF does not have the authority to buy gold.

Does the FRB's holding of SDRs as collateral violate the IMF articles of agreement? Probably not, but worth checking into.

According to the minutes I sent you earlier, the US Treasury has sold EIGHT BILLION in $42.22 oz gold SDRs to the FRB as of 1995.

According to the IMF, we only have $4,250,000,000 in SDR credits. So it would seem that we are in fact 4 billion in SDRs overdrawn? At $42.22 an ounce? Lets see now;..the US is short at least 94,741,000 ounces of gold?

Am I missing something again?

And the gold certificates eat up the rest. Would be interesting to check the latest 12 FRB's annual reports and see if we are short gold there too.

Dave
SHIPDIVING@aol.com