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An Examination of Evidence Indicating Exchange Stabilization and Federal Reserve Gold Market Activity - Andrew Hepburn

Section: Essays

The Gold Anti-Trust Action Committee (GATA) believes that the Exchange Stabilization Fund, under the authority of the President and Treasury Secretary has been used to surreptitiously manipulate the price of gold. The following report is an examination of pertinent evidence against the ESF, as well as information implicating the Federal Reserve in a scheme to artificially depress bullion prices. Accounting regulations devised by the International Monetary Fund are also scrutinized. The report draws mainly from government documents, previous GATA commentaries and other publicly available material. The only reasonable conclusion is that U.S. government denials of gold market activity are false.

The U.S. Treasury explicitly denies that the ESF has been used for gold market interventions. On the "Frequently Asked Questions" section of their website, the following claim is made: "The ESF has not been used to manipulate gold prices. In fact, the ESF has not held gold since 1978."


This assertion was also made in Howe vs. Bank for International Settlements, et al:

Although unnecessary at this juncture, the Secretary specifically denies

that the Treasury or the ESF since 1978 has traded in gold or gold derivatives

for the purpose of influencing the price of gold or the exchange value of the

dollar. In fact, the ESF has not held any gold since 1978.

(Memorandum of Secretary of the Treasury in support of Motion to Dismiss-filed March 15, 2001)

See (page 3, footnote 4.)

The claim that the ESF has not traded in gold since 1978 seems to be contradicted by other government documents. For example, the following can be found in U.S. Treasury Directive TD 27-04 (, dated November 17, 1996, describing the functions of the Office of Under Secretary (International Affairs) and the duties of the Deputy Assistant Secretary (International Monetary and Financial Policy) (part 5.h):

Provides direction to the Federal Reserve Bank of New York concerning Exchange Stabilization Fund (ESF) operations under the authority of the Secretary of the Treasury and other Treasury officials who are delegated such authority to assure that operations of the Federal Reserve System concerning the ESF are coordinated. In this regard, the incumbent intensively monitors foreign exchange markets and maintains continuing monitoring of gold markets and related developments.
[Emphasis Supplied.]

Why does the incumbent "maintain(s) continuing monitoring of gold markets and related developments"? The preceding sentence provides the answer: "... to assure that operations of the Federal Reserve System concerning the ESF are coordinated." (It should be noted that the New York Fed acts as the fiscal agent for the ESF.)Though this directive does not prove that any specific intervention occurred, it nonetheless strongly suggests that the ESF was far more concerned with the gold market than the Treasury has contended. After all, why would they monitor a market in which they purportedly have not traded since 1978? Logically, monitoring a market is ineffective if no action is contemplated pursuant to such observation.

As noted above, the Treasury claims that, "The ESF has not held gold since 1978." This is demonstrably false. The Federal Reserve's Statement of U.S. Reserve Assets for January 2001 contains the following line item: "Gold Stock, including Exchange Stabilization Fund."


Keep in mind that one month earlier, Reg Howe filed suit against (among others) the Secretary of the Treasury. That might explain why the above line item was altered for the February 2001 Statement of U.S. Reserve Assets to read: "Gold Stock."


As is apparent, the Federal Reserve removed the explanation, "including Exchange Stabilization Fund." No reason was provided when the line item was altered. More importantly perhaps, the Fed has stonewalled repeated inquiries asking why this change was made. While Fed officials have responded to letters on the subject, at no point have they explained the rationale behind the removal of the ESF reference.

The Fed did not simply remove the reference to gold held by the ESF. As James Turk observes in "What is Happening to America's Gold?" (


The US Reserve Assets report now excludes all reference to the ESF, and previous reports already published have been changed.Not only were the figures adjusted, but all reference to the ESF has been eliminated. Reg Howe posted to his website an excellent article addressing this change, and says: "...the figures could not be changed without a change in description, proof that the earlier discrepancies were indeed on account of gold held by the ESF."[Emphasis Supplied.]

The issue of gold held by the ESF is examined in considerable detail by Reg Howe in a commentary available at . A relevant excerpt reads as follows:

Fed Stops Reporting Gold Held by ESF. Paragraphs 62-64 of the Complaint identify

instances of month-end discrepancies from 1974 through January 2000 between the

Fed's gold certificate account, which by law must include certificates for all gold held

by the Treasury, and the total U.S. gold stock, including gold held by the Exchange

Stabilization Fund, as reported in tables 1.18 and 3.12, respectively, of the Federal

Reserve Bulletin. By definition, these discrepancies reflect positive or negative

month-end gold balances at the ESF, and thus necessarily imply corresponding gold

trading activities by the ESF.

The discrepancies cited by Howe were the basis for James Turk's essay entitled "The Smoking Gun." (See By comparing the Fed's gold certificate account with the total U.S. gold stock as reported in the Federal Reserve Bulletin, Turk concluded that the ESF was indeed active in the gold market. For example, on December 31, 1999, the ESF appears to have held 971,000 ounces of gold. Not surprisingly, the discrepancies indicate that increased ESF activity began in 1996. This was the same year that the Treasury's Under Secretary (International Affairs) was directed to "maintain[s] continuing monitoring of gold markets and related developments." [Emphasis Supplied.]

The Treasury specifically denies, on the FAQ section of its website that the ESF has conducted a gold swap in the last ten years. In addition, a court filing on behalf of Secretary O'Neill specifically denied that the ESF had conducted gold swaps after 1978:

The Secretary reiterates that the ESF has not since 1978 dealt in gold,

including "gold swaps."

(Reply Memorandum of Paul H. O'Neill in Further Support of Motion to Dismiss.) (page 3, footnote 2.)

This assertion appears to be contradicted by a statement made during a January 31, 1995 Federal Open Market Committee meeting. Responding to a question raised by then Federal Reserve Board Governor Lawrence Lindsey about the legal authority of the ESF to engage in the financial rescue package for Mexico then under discussion, J. Virgil Mattingly, general counsel of the Fed and FOMC, stated (p.69):

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 [31 U.S.C. s. 5302] 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 supplied.]


The timing of this remark makes sense when the Treasury Directive mentioned above is considered. It is dated November 17, 1996. Mattingly's "gold swaps" reference was made on January 31, 1995. But the "monitoring" of the gold market did not begin on November 17, 1996. We know this because the Directive specifically said, "maintains continuing monitoring of gold markets and related developments." Clearly, the monitoring of gold markets in 1996 was a continuation of an established program of observation.

Rather than explain the details of the "gold swaps" he cited, the Fed's top lawyer now denies ever making the remark. In a memorandum dated June 8, 2001, to Chairman Greenspan (and later released by him to Senator Jim Bunning, Kentucky) (, Mr. Mattingly disclaims his 1995 statement about gold swaps, stating in relevant part:


"Given the passage of time, some six years, I have no clear recollection of exactly what I said that day but I can confirm that I have no knowledge of any "gold swaps" by either the Federal Reserve or the ESF.I believe that my remarks, which were intended as a general description of the authority possessed by the Secretary of the Treasury to utilize the ESF, were transcribed inaccurately or otherwise became garbled"[Emphasis Supplied.]

The assertion that the transcript is inaccurate is clearly preposterous. The prefatory note

to the January 1995 FOMC transcript contains the following statement:

The 1995 transcripts, prepared shortly after each meeting or conference call, were

produced by the FOMC Secretariat from recorded proceedings of the meetings. The

Secretariat lightly edited the speakers' original words to facilitate the reader's

understanding. This editing involved some rewording, primarily for syntax purposes,

or in some instances to complete or clarify a speaker's thought or to correct an obvious

misstatement. But in no case did the editing alter the substance of the comments

made. Meeting participants were then given an opportunity to review the

transcripts for accuracy. [Emphasis Supplied.]


In a piece entitled "GATA's Smoking Gun has Real Smoke", mining journalist Tim Wood of The Mining Web effectively highlights the unlikelihood that Mr. Mattingly's remarks were indeed inaccurately transcribed. Examining the "gold swaps" comment in the context of the Mexican bailout discussion conducted by the Fed, Wood writes:

There is considerable ambiguity in the 1995 transcript that deals with the Mexican

crisis, but a full reading doesn't create the context for the errors suggested by

Mattingly. The stream of consciousness prior to Mattingly's comments is clearly

established within the context of the discussion. Larry Lindsey, now president Bush's

economic confidante, is nervous about the legality of using the ESF in support of

currencies other than the American dollar. There is not a lot of reassurance on offer

until Mattingly intervenes. It is inconceivable to think that he had not been mulling

over what to say; confirming it mentally before giving his imprimatur.

The weighty discussion and gravity of the situation rule out that he was casually

flinging out words. Similarly, the use of "swaps" in the total transcript is very specific,

always referring to currency swap lines and swap arrangements. It is notable that

"swap" is only used about a dozen times, is always in the present tense and seldom in

the plural. It just doesn't fit that Mattingly's comments would have been

mistranscribed, especially not since the phrasing is so specific - past tense (it has

covered...); definitive (the); out of context (gold); and in the plural (swaps).

The context Mattingly wishes to establish is all too clear - he is wanting to reassure

Lindsey that the ESF has such broad authority that it has even covered something as

unusual as gold swaps.


The "considerable ambiguity" in the transcript mentioned by Wood is partly due to the fact that FOMC transcripts are heavily redacted before publication. It is quite possible that other references to ESF gold market activity were made during the January 31, 1995 meeting, only to be redacted later. Logically, the failure to redact Mattingly's gold swaps comment was a simple oversight, as it was a parenthetical remark he made when discussing ESF authority.

There is a second, albeit more subtle reference to U.S. government gold swaps after 1978 that can be found in another FOMC transcript. From the transcript of the minutes of the Federal Open Market Committee on March 26, 1991 ( Near the end of a lengthy discussion (pp. 8-21) of U.S. foreign exchange reserves, which are held in approximately equal portions by the Fed and the Exchange Stabilization Fund, then-Fed governor Wayne Angell added (p. 19):


There's one slight addendum to this discussion: ... [If] you mark our gold to the $358 price, we end up with something like $170 billion [in total foreign exchange and gold reserves]. There are opportunity costs because we don't get interest on that gold as we do on our foreign exchange [holdings]. That cost is out there also. I would hesitate for us to have foreign currency holdings that have swap puts that just sit there, [which] is now becoming the case for our gold.[Emphasis supplied.]

Though stopping short of claiming that the 1991 transcript is inaccurate, the Federal Reserve nonetheless has distanced itself from the "swap puts" comment attributed to then-governor Angell. Responding to an inquiry, on July 23, 2002 the Federal Reserve wrote, in relevant part:

Pursuant to your request of June 19, we have conducted additional research regarding remarks attributed to former Governor Wayne Angell in transcripts of the Federal Open Market Committee meeting on March 26, 1991.
Unfortunately we have not been too successful in determining what former Governor Angell may have meant to suggest by his reference to "swaps puts" for gold.
We have determined, however, that there is no such thing as a "swap put." [Emphasis Supplied.]


A detailed analysis by Reg Howe of the 1991 "swap puts" reference can be found at A brief excerpt from that piece highlights the key aspects of the Angell remark:


However ambiguous their precise nature, certain attributes of Mr. Angell's "swap

puts" appear quite clear: (1) they attached to "our gold," meaning the official U.S. gold

reserves; (2) they were in 1991 part of an existing and growing program as

encompassed in his expression "now becoming the case;" and (3) they must either

have been of long maturity or possessed roll-over provisions because otherwise they

would not "just sit there." Since his departure from its board of governors, Mr. Angell

has stated more than once during appearances on financial TV programs that the Fed

has "precise control" over the price of gold. His 1991 comments to the FOMC open a

window on just how this control is achieved.

An online commentary by Howe examined another comment about gold made by former Fed Governor Wayne Angell:

Indeed, the following October 7, 1998, quote attributed to a former Fed governor

appearing on CNN's Moneyline seems to reflect considerable sensitivity to the oil-

gold link: "The Fed has precise control over the price of gold and therefore over

commodities such as crude oil. No inflation, therefore no need to raise

rates." [Emphasis Supplied.]


Just one year after his "swap puts" reference, Wayne Angell informed a public audience about his views toward gold. From "The Education of a Speculator" by Victor Neiderhoffer (p. 381):

Federal Reserve Chairman Alan Greenspan and ex-Governor Wayne Angell have made much of the signaling function of gold. If gold goes up too much, the Fed knows it has to slam on the breaks to keep the inflationary temperature down. At the annual COMEX dinner I attended in 1992, I heard then Governor Angell (who has since departed the Fed for greener pastures at Bear Stearns) describe how his first desire would be to fix the price of gold at a permanently low level by central bank sales whenever it rose above $350. But he gave up the idea (wild applause) because gold's homeostatic function would be ruined. The abject deference the Governor enjoyed at the dinner, while he floated a trial balloon that would have ruined the livelihood of the 1,000 or so attendees, was a testament to the monstrous control that governments exert over business through their affiliates such as the Fed and certain other three-letter agencies. [Emphasis Supplied.]

As detailed in "Behind Closed Doors" by James Turk,( GATA believes that American gold has been used as collateral in order to obtain foreign gold, which has subsequently been lent or sold to depress prices. This theory is based on three important facts. First of all, as evidenced by the above FOMC transcripts, the ESF (and possibly the Fed) has conducted gold swaps. Secondly, the U.S. Mint, which serves as custodian for the U.S. reserve, reports that the entire gold stock is intact. Finally, Wayne Angell made specific note of the fact that the "swap puts" were attached to "our gold." Therefore, any gold swaps could have only involved trading the ownership of American gold for bullion in another central bank's vault. This is preferable to directly selling American reserves, in which case the Mint would be forced to report a drawdown at the nation's bullion depositories. A gold swap allows the Treasury to mobilize gold without raising the alarm of those who audit the Fort Knox, Denver and West Point vaults. With this in mind, a remark by Alan Greenspan in a 1998 House Banking Committee hearing is illuminating:

Nor can private counterparties restrict supplies of gold, another commodity whose

derivatives are often traded over-the-counter, where central banks stand ready to

lease gold in increasing quantities should the price rise. [Emphasis Supplied.]



He elaborated on this statement in a letter to Senator Lieberman dated January 19, 2000:


This observation simply describes the limited capacity of private parties to influence the gold market by restricting the supply of gold, given the observed willingness of some foreign central banks -- not the Federal Reserve -- to lease gold in response to price increases. [Emphasis Supplied.]


Greenspan's statement supports GATA's theory. For the most part, GATA does not believe that an ESF-led scheme to manipulate gold prices involves directly selling significant portions of U.S. gold. Rather, the ESF was used to set up the swap lines with foreign central banks. Therefore, when the Fed Chairman remarks that "some foreign central gold in response to price increases", it is entirely possible that the ESF has outstanding gold swaps with those nations. So while another country's gold is being leased in response to price increases, it could be at the behest of the U.S. After all, how has Alan Greenspan "observed (a) willingness of some foreign central banks to lease gold in response to price increases?" His awareness of their leasing practices would be guaranteed if the ESF and/or Federal Reserve were essentially directing such operations.

Bolstering GATA's claim that gold swaps have jeopardized the ownership of a substantial portion of the U.S. reserve is an accounting change made in September 2000. The U.S. Mint reclassified approximately 1700 tonnes of gold at West Point, New York to "Custodial Gold Bullion" from "Gold Bullion Reserve."

See for the August 2000 Status Report of U.S. Treasury-Owned Gold and for the September 2000 report.

The Mint did not explain why the West Point gold was re-classified and the gold at Fort Knox and Denver was not. But before they could be pressed on the issue, in July 2001 the Mint re-designated 94% of the U.S. gold reserve as "Deep Storage." Once again, no reason was provided for the accounting change.

See for the July 2001 Report.

In "Behind Closed Doors", James Turk explains the logical relationship between Mattingly's gold swaps remark and the reclassification of the West Point gold:

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 re-classified 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.


On May 23, 2001 at a House Financial Services Committee hearing, Treasury Secretary O'Neill was asked about gold swaps by the ESF. His exchange with Rep. Ron Paul (R-Texas) follows:

Dr. Paul: Recently there were some minutes released from a discussion with the

Federal Reserve that occurred in 1995 dealing with the Mexico City bailout, and in

this discussion they recognized that the Exchange Stabilization Fund could be

involved in gold swaps, and this was recognized as being legal.

The question also came up whether or not there were any other agreements made,

other than the one that was currently pending with Mexico, and the answer to that was

yes, indeed, we had a swap arrangement with the Bundesbank.

My question to start with is: did that swap arrangement deal with a gold swap, and

does it continue to exist? I would like that answered in light of the fact that up until

August of the year 2000, the status report on the U.S. Treasury gold always reported

that gold at the West Point Reserves, the amount was 1,710 tons, was called gold

bullion reserves. In September that label changed, and it changed to custodial gold.

During that same period of time, the Bundesbank also had a reduction of gold that

they held by 1,700 tons.

I would like to know what is the connection between these two events, and what does

this all mean? Do we have gold swaps with Germany, and could we have a little bit of

transparency so I can better understand this process?

Mr. O'NEILL. Well, I will tell you, I would not probably be in a position to answer

any of these questions except for the fact that on Sunday night when I was working

through my briefcase, I found a report that it is my duty to transmit to the Congress

providing the information on the most recent examination of the Exchange

Stabilization Fund. Indeed, this was a fund set up in the Roosevelt Administration in

1934 for the express purpose of protecting the American financial system from the

vagaries of the rest of the world's finance systems. Just as you say, it is empowered to

operate in gold and in currencies, and there is a substantial latitude as to how this

arrangement can work.

My memory is that last year there was one transaction. It was a fairly small

transaction involving an agreed intervention vis-a-vis the yen. It was the only

transaction last year. I can assure you, and we will make sure you get a copy of this

report, that I found the report really quite complete in its documentation of what was

done in the past year.

I don't know the 1995 circumstance. In fact, the funds in the Exchange Stabilization

Fund are marks and yen, and, if I can say it this way, attributed dollars. But the U.S.

Government does still have gold reserves, and just by coincidence, Chairman

Greenspan and I were talking about those reserves this morning. It turns out, by his

best recollection-I didn't check, because I assumed that his recollection is always

right-but, he was noting this morning that the U.S. holdings of gold are some $80

billion, which I observed is just about the same as Bill Gates' net worth, for whatever

that is worth.

In any event, we will get you a copy of the Exchange Stabilization Fund report, and if

there are additional details you would like to have, I would work with you to see if we

can't get them for you.


It's on the public record. Rep. Paul asked, "Do we have gold swaps with Germany...?" That's a straightforward question that the Treasury Secretary could easily answer. But rather than respond to the Congressmen's inquiry, O'Neill ducked the issue entirely. However, he may have provided a subtle hint as to gold market activity by the ESF. The Secretary told Rep. Paul:

Just as you say, it is empowered to operate in gold and in currencies, and there is a substantial latitude as to how this arrangement can work. [Emphasis supplied.]

Considering the Treasury's denials of ESF gold market activity, it is rather odd that O'Neill would emphasize the ability of the fund to operate in the metal.

The belief that gold swaps have jeopardized the ownership of a significant portion of the U.S. reserve was further substantiated in an essay by James Turk entitled, "Accounting for the ESF's Gold Swaps." (Available at Turk uncovered what appears to be a gold liability of up to $20 Billion in the Consolidated Financial Statements of the U.S. Government. In "The Investment Case for Gold", ( highly successful gold mutual fund manager John Hathaway assessed the implications of Turk's discovery:

However, valuable insight is provided by the work of James Turk in "Accounting

for the ESF's Gold Swaps" (1/7/02 Freemarket Gold & Money Report.) While

his complex analysis of the mechanics and the accounting may be less than

perfect, it is in my opinion substantially on the money. The bottom line is that

US government official gold reserves have been mobilized through swap and

loan arrangements to suppress the gold price, particularly in the aftermath of

the Sept. 1999 Washington Agreement, which triggered a violent short

squeeze. [Emphasis Supplied.]

Hathaway's contention that the U.S. suppressed the price of gold "in the aftermath of the Sept. 1999 Washington Agreement" is credible given the following statement attributed to Edward A. J. George, Governor of the Bank of England:


We looked into the abyss if the gold price rose further. A further rise would have taken down one or several trading houses, which might have taken down all the rest in their wake. Therefore at any price, at any cost, the central banks had to quell the gold price, manage it. It was very difficult to get the gold price under control but we have now succeeded.The U.S. Fed was very active in getting the gold price down. So was the U.K.; [Emphasis Supplied.]

See Paragraph 55 in Howe v. Bank for International Settlements, et al., United States District Court for Massachusetts, No. CV-00-12485-RCL (

Paragraph 60 of the Complaint provided further evidence demonstrating that Greenspan was concerned about a rising gold price:

Canadian Imperial Bank of Commerce ("CIBC"), which apparently has assumed overall responsibility from Goldman for managing Ashanti's hedge book, is advising Ashanti regarding sale of a 50% interest in its Geita gold project in Tanzaniato to AngloGold. This transaction, which became unconditional on November 30, 2000 is expected to close by December 15, required the approval of Ashanti's bullion banks and its shareholders, including Lonmin and the Government of Ghana. According to reliable reports received by the plaintiff, representatives of CIBC held discussions with Fed officials while this transaction was pending. In the course of these discussions, Mr. Greenspan's desire to hold down gold prices was expressed. Ashanti's financial problems presented a major risk not only to its survival but also to the balance sheets of its bullion banks. [Emphasis Supplied.]



One other official institution, over which the U.S. Treasury has considerable influence has distinguished itself with questionable accounting practices. In October 1999, less than one month after the post-Washington Agreement gold price explosion, the Statistics Department of the International Monetary Fund published a document entitled, "The Macroeconomic Statistical Treatment of Securities Repurchase Agreements, Securities Lending, Gold Swaps and Gold Loans." (See ) This draft paper, discovered by GATA consultant Michael Bolser recommended that central banks record as a reserve asset gold that had left their vaults by way of a swap. Simply put, member nations would be advised not to differentiate between gold in the vault and gold receivables.

With the above in mind, GATA supporters around the world posed the following question to the IMF in October 2001:

Why does the IMF insist that members record swapped gold as an asset when a legal change in ownership has occurred?


The IMF responded that:

This is not correct: the IMF in fact recommends that swapped gold be excluded from reserve assets. (See Data Template on International Reserves and Foreign Currency Liquidity, Operational Guidelines, para. 72, [Emphasis Supplied.]


A footnote on the central bank of the Philippines website contradicts the IMF's claim:

Beginning January 2000, in compliance with the requirements of the IMF's reserves and foreign currency liquidity template under the Special Data Dissemination Standard (SDDS), gold swaps undertaken by the BSP with non-central banks shall be treated as collateralized loan. Thus, gold under the swap arrangement remains to be part of reserves and a liability is deemed incurred corresponding to the proceeds of the swap. [Emphasis Supplied.]


Responding to an inquiry, the European Central Bank also revealed that swapped gold was to remain a reserve asset. The ECB wrote:

You have asked us about the IMF recommendation in cases where the ECB engages in gold swaps.

Following the recommendations set out in the IMF operational guidelines of the "Data Template on International Reserve and Foreign Currency Liquidity" which were developed in 1999, all reversible gold transactions, including gold swaps, are recorded as collateralised loans in balance of payments and international investment position statistics. This treatment implies that the gold account would remain unchanged on the balance sheet. [Emphasis Supplied.]

The Bank of Finland and the Bank of Portugal also confirmed in writing that swapped gold remains a reserve asset under pertinent IMF regulations.

The influence of IMF recommendations for gold swaps, loans and deposits should not be underestimated. For example, on its balance sheet the German Bundesbank lists "Gold and Gold Receivables" as a one line item. (See This approach is in direct conflict with Generally Accepted Accounting Principles (GAAP), which the central bank is obligated to follow as per German banking law. (See Section 26 (2) of the Bundesbank Act-available at

In response to an inquiry, the Bundesbank justified their accounting treatment on the grounds that IMF rules take precedence over domestic law. The effect is obvious: from published financial statements there is no possible way to determine how much gold Germany holds in its vaults. The refusal of the Bundesbank to provide a breakdown between physical gold and gold receivables belies any notion of market transparency.

GATA believes that the implications of IMF accounting procedures for reversible gold transactions are very significant. Clearly deceptive accounting, countenanced by the IMF has allowed official sector gold to hit the market without a corresponding drawdown on the balance sheets of central banks. This has made it impossible for analysts to ascertain the exact size of official sector gold loans, swaps and deposits. The unwillingness of central banks to provide even a minimum level of transparency suggests that total gold receivables are substantially larger than the accepted industry figure of approximately 5,000 tonnes. Macroeconomist and former World Bank consultant Frank Veneroso contends that 10,000-15,000 tonnes of gold have left central bank vaults via loans, deposits and swaps. (His rationale is thoroughly explained in a presentation available at GATA believes that much of the difference between the total endorsed by the World Gold Council and that of Frank Veneroso can be explained by secret Exchange Stabilization Fund gold swaps.

Years before official sector gold market intervention began in earnest, a future U.S. government official described, by implication the telltale sign that the gold market was being controlled. In 1988, Harvard president and former U.S. treasury secretary Lawrence H. Summers, then Nathaniel Ropes professor of political economy at Harvard, co-authored with Robert B. Barsky an article entitled "Gibson's Paradox and the Gold Standard" published in the Journal of Political Economy (vol. 96, June 1988, pp. 528-550). A principal conclusion of the article is that in a genuinely free gold market unaffected by "government pegging operations," gold prices will move inversely to real long-term interest rates, rising when real rates fall, and falling when real rates rise.

A commentary on this article published in August 2001 at The Golden Sextant ( includes the chart reproduced below depicting real long-term interest rates (30-year T-bond yield minus 12-mos. cumulative CPI) and gold prices (inverted) since 1977. As the commentary points out:

Gibson's paradox continued to operate for another decade after the period covered by Barsky and Summers. But sometime around 1995, real long-term interest rates and inverted gold prices began a period of sharp and increasing divergence that has continued to the present time. During this period, as real rates have declined from the 4% level to near 2%, gold prices have fallen from $400/oz. to around $270 rather than rising toward the $500 level as Gibson's paradox and the model of it constructed by Barsky and Summers indicates they should have.

The historical evidence adduced by Barsky and Summers leaves but one explanation for this breakdown in the operation of Gibson's paradox: what they call 'government pegging operations' working on the price of gold. What is more, this same evidence also demonstrates that absent this governmental interference in the free market for gold, falling real rates would have led to rising gold prices which, in today's world of unlimited fiat money, would have been taken as a warning of future inflation and likely triggered an early reversal of the decline in real long-term rates.

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An internal report by the Royal Bank of Canada (available at perhaps best described the information indicating that the price of gold has been manipulated. After listing eleven (11) independent pieces of evidence proving "unsustainable gold price manipulation", the report stated:

One or two of these factors could be viewed as random, but the full body of evidence is overwhelming.

October 29, 2002

Andrew Hepburn, Gold Anti-Trust Action Committee