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No one can be sure that Fed doesn't meddle with futures or ETFs
8:03p ET Wednesday, August 3, 2016
Dear Friend of GATA and Gold:
Financial letter writer and technical analyst Steve Saville contends today that the Federal Reserve couldn't possibly be intervening directly in the stock market by purchasing stock index futures or exchange-traded funds because evidence of such transactions would show up on the Fed's public books:
http://tsi-blog.com/2016/08/does-the-fed-support-the-stock-market/
There are a few problems with this assertion, quite apart from Saville's failure ever to put a critical question to a central bank.
1) First is that Saville's proposition is misleading. Saville acknowledges that the Fed could seek to support equity prices through "monetary policy and 'jawboning.'" But the Fed also could undertake futures and ETF purchases through intermediaries, just as the Treasury Department could undertake such purchases through its Exchange Stabilization Fund or through intermediaries.
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2) Contrary to Saville's suggestion, not all important Federal Reserve records and transactions are public. The Federal Reserve Bank of New York operates a massive trading room executing transactions for itself and the Treasury Department that are not individually disclosed.
3) Most of the Fed's gold transaction records are secret, as established in 2009 by GATA's partially successful freedom-of-information litigation against the Fed, litigation that extracted an acknowledgment from a member of the Fed's Board of Governors that the Fed has secret gold swap arrangements with foreign banks:
Just a few months ago the president of the Federal Reserve Bank of New York, William Dudley, taking questions after a presentation to a group of economists meeting at the Virginia Military Institute, clumsily evaded a question about those gold swaps, and his publicist at the New York Fed refused even to acknowledge a follow-up question about the swaps:
http://www.gata.org/node/16341
So what are the Fed and its partner central banks and other banks doing with the swapped gold? Are they just filling gaps in their collection of refiner hallmarks? Or are they facilitating secret interventions by each other in the markets? Saville hasn't asked and doesn't seem to want to know.
4) The ESF is fully authorized by law, the Gold Reserve Act of 1934 as amended in the 1970s, to trade secretly in any market, domestically and around the world:
https://www.treasury.gov/resource-center/international/ESF/Pages/esf-ind...
The New York Fed well may execute ESF trades but they would belong to the ESF and not necessarily appear on the Fed's public books. Indeed, New York Fed President Dudley purported not to be able to answer the gold swap question at the Virginia Military Institute because it involved "individual customer transactions," though it didn't. The question was simply whether the Fed is involved with gold swaps.
5) According to documents filed with the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission, some governments and central banks have at least prepared themselves to trade all U.S. futures contracts in secret -- not just financial futures but commodity futures as well -- by arranging volume discounts for their trading with the operator all the major futures exchanges in the United States, CME Group:
http://www.gata.org/node/14385
http://www.gata.org/node/14411
The Fed or the Treasury could be undertaking such trades directly or through intermediaries.
6) The Fed undertakes frequent transactions with at least 23 investment banks designated as primary dealers in U.S. government securities. These transactions effectively direct money in various directions that are not all formally specified in public. The investment banks have a huge interest in deploying the Fed's money in ways that will please the Fed and keep the money flowing to the investment banks. The primary dealers are required to "participate consistently in open market operations to carry out U.S. monetary policy pursuant to the direction of the Federal Open Market Committee and provide the New York Fed's trading desk with market information and analysis helpful in the formulation and implementation of monetary policy":
https://www.newyorkfed.org/markets/pridealers_current.html
Is Saville privy to all that communication and the market activity to which it leads? He is not listed as a primary dealer.
7) The chairman of the Federal Reserve, Janet Yellen, and New York Fed President Dudley are members of the Board of Directors of the Bank for International Settlements in Basle, Switzerland, the central bank of the central banks:
https://www.bis.org/about/board.htm?m=1%7C2%7C2
According to its annual report, the BIS regularly undertakes secret transactions in various markets for its member central banks:
https://www.bis.org/publ/arpdf/ar2016e_ec.pdf
In 2008 the BIS actually advertised to potential new central bank members that its services include secret interventions in the currency and gold markets and "off-balance-sheet" asset management:
http://www.gata.org/node/11012
Is Saville privy to that stuff too?
One way Saville could test his confidence that the Fed isn't involved, directly or indirectly, with index futures or ETFs would be to try to attend a meeting of its Board of Governors or Federal Open Market Committee. Of course anyone who did that would be arrested, but maybe something like that would be the only antidote to Saville's credulity -- if it is credulity and not just another contrived defense of financial newsletters that provide technical analysis of markets that were commandeered by the government long ago.
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
CPowell@GATA.org
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