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Alasdair Macleod: U.S. dollar on a gold standard? Not if the gold is gone
2:53p ET Tuesday, November 26, 2024
Dear Friend of GATA and Gold:
Market analyst Alasdair Macleod's commentary yesterday at his proprietary internet site at Substack, headlined "U.S. Dollar on a Gold Standard?," seemed so compelling to your secretary/treasurer that he asked permission to share it with you, which Macleod has kindly granted, so it is appended.
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Macleod's insights may make you want to consider subscribing to his Substack letter, which comes out every few days. A seven-day free trial subscription is available. Rates are $10 per month or $120 per year. To subscribe, please visit:
https://alasdairmacleod.substack.com/
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
CPowell@GATA.org
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U.S. Dollar on a Gold Standard?
Judy Shelton recently proposed a long bond convertible into gold. She obviously believes in the integrity of U.S. gold reserves. I don't.
By Alasdair Macleod
Monday, November 25, 2024
Judy Shelton is a well-known sound-money advocate and former economic adviser to President Trump. This month she set everyone buzzing with a proposal to issue a new 50-year Treasury bond redeemable in gold. If her plan is to be followed through, it would not be gold convertibility for the dollar but merely an alternative to inflation-linked TIPS bonds.
We can argue about how things for the dollar would evolve from there and the likelihood that this would be the first step to a new gold standard for the dollar, but that is a separate debate. Anyway, dollar-centric Fed and Treasury officials would dismiss it as providing too much uncertainty to government financial obligations, because they would argue that gold is unpredictably volatile and they would not want to see a revived debate about its monetary role.
But there is a far greater problem in the background, and that is the integrity of the U.S. Treasury's gold reserves. Do they actually exist, and, if so, to what extent?
And here we come back to the findings of analyst Frank Veneroso more thqan 20 years ago.
Famously, in a speech in Lima, Peru, in 2002, Veneroso wrote:
"Now we have a conservative set of gold lending numbers and we have a more aggressive set of such numbers. Our range of estimates implies that somewhere between 10,000 and 16,000 tonnes of the official-sector gold position has left those vaults by way of the lending process."
The full speech can be found on GATA's website here:
https://www.gata.org/node/4249
By the way, the higher figure is 50% of the official gold reserves reported (32,412.8 tonnes) when Veneroso spoke.
As a side note, Veneroso said he embarked on his analysis following a speech by Terry Smeeton, who he said was head of the Bank of England's gold department. In fact, Smeeton was head of foreign exchange operations, which included gold. I got to know him in the late 1980s when we lunched together occasionally at the Banker's Club, just behind the bank. And what Veneroso wrote about Smeeton I can confirm as being consistent with the man I knew.
Returning to our subject, from the end of Bretton Woods in 1971 the U.S. Treasury embarked on a policy of displacing gold with the dollar, a policy that involved virulent anti-gold propaganda and actions, like the birth of the gold carry trade, whereby central bank gold was leased or swapped for interest rates of 1%, sold for dollars, and invested in U.S. T-bills yielding considerably more.
T-bill rates declined from over 10% in the early '80s to 4% in 1998.
As Veneroso put it, this leased and swapped gold ended up adorning the necks of Asian women and was never going to return.
Accounting for this was simple.
Replacing the lease or swap agreement would be a debt obligation on the part of the lessee in perpetuity, presumably at the official rate of $42.22 per ounce. Under the International Monetary Fund's rules, the missing gold is accounted for as an asset in the Treasury's (or central bank's) reserves, even though it is not in possession.
Note the distinction.
And from the Banker’s Club in Lothbury, security trucks -- often two or three at a time, moving gold back and forth from the bank's rear entrance -- could be observed most days of the week.
While the Bank of England continues to lease and swap gold (I believe more by book entry nowadays, rather than by delivery), there is no doubt that the U.S. Treasury and the Federal Reserve Bank of New York Fed (which stores foreign central bank gold) are severely short of the physical, as was revealed when Germany's Bundesbank asked for some of its gold back. Not only were BuBa officials not permitted to visit and audit their holdings supposedly held under earmark, but they were quoted seven years to return just a fraction of their property.
No, Ms. Shelton. It's a nice idea but the gold isn't there to back a long bond convertible into it.
We should know that U.S. officials lie and cheat when it comes to real, legal money. No surprise there.
But a more interesting question is the fate of all those open-ended commitments owed by operators like Goldman Sachs (which wasn't a bank at the time but a trading operation). If these obligations are properly accounted for, not only are the U.S. Treasury and the Fed bust, but so too are members of the bullion banking community owing these obligations.
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Alasdair Macleod is of head of research for GoldMoney.
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