8:50p ET Tuesday, July 31, 2001 Dear Friend of GATA and Gold: The Treasury Department has replied to GATA's latest questions, through Sen. Joseph I. Lieberman, and the answers are disappointing in the extreme. Treasury's reply was dated July 13 and signed by John M. Duncan, assistant secretary for legislative affairs. Duncan writes that the U.S. government has undertaken no gold swaps in the last 10 years. He declines to answer GATA's questions about the reclassification of the U.S. gold reserves at West Point. "These questions," Duncan writes, "have been referred to the Bureau of the Mint for a direct response." As for GATA's desire to know what U.S. policy on gold is, Duncan writes: "The Treasury Department will continue to hold U.S. gold reserves and to value these reserves at $42.2222 per ounce." If you believe that this response is the full extent of the thinking of the U.S. government on gold, I'd like to talk to you about buying a bridge in Brooklyn that I was unable to sell to Reg Howe at lunch today. Fortunately, as you'll see from his latest incisive essay, attached here, Reg and his remarkable discovery team have found more references to gold swaps in Federal Reserve minutes. The Fed does seem to talk a lot about these supposedly only mythical creatures. GATA will continue the hunt for them in the flesh, and, in this hunt, more letters to members of Congress, seeking a full and candid explanation of U.S. policy on gold, will be crucial. Along these lines, a GATA supporter has just sent to Kentucky Sen. Jim Bunning a letter that is so much to the point that I must share it with you here, for it shows what all of us have to do to try to engage our members of Congress in the gold issue: * * * Dear Senator: Forgive my not awaiting reply to earlier letters (Attachments 1 and 2) on the gold scandal that is slowly coming to light. I take seriously your inquiry into this key matter, and want you to benefit from recent research by recognized experts. With this in mind, I am enclosing the essay, "What is Happening to America's Gold" (Attachment 3), published by James Turk just last week. As you read Mr. Turk's analysis, I ask you to consider whether there is a giant coverup under way by those who have mishandled our national gold stockpiles and now seek to avoid detection. It is clear that the price of gold has been manipulated by a few public and corporate officials since the mid-90's. But it now also appears that their chief tool has become the illicit selling (or swapping) of U.S.-owned gold, and that records are being altered to shield these transactions from Congress and the public eye. A possible added means of price manipulation is an unapproved distribution of gold held by the International Monetary Fund, which Congress explicitly vetoed two years ago. Thank you, in advance, for continuing to pursue this critical issue. Sincerely, B.L. * * * Government officials can mislead and dissemble for a while in response to our correspondence, but if we can engage a few congressmen in the details and get some questions asked at congressional hearings, such misleading will start running risks. So let's keep at it. CHRIS POWELL, Secretary/Treasurer Gold Anti-Trust Action Committee Inc. ----------------------------------------------- Swapping Lies: Fed and Treasury Officials Hanging Themselves By Reginald H. Howe www.GoldenSextant.com August 1, 2001 Although the court case is not moving as swiftly toward discovery as some had hoped, neither my discovery team nor GATA's many supporters are remaining idle. Last week two GATA stalwarts, Mike Bolser and Dave Walker, working independently but for the common cause, came across another official reference to gold swaps, this time in the transcript of the minutes of the Federal Open Market Committee on March 26, 1991: http://www.federalreserve.gov/fomc/transcripts/1991/910326Meeting.pdf This reference came at the end of a lengthy discussion (pp. 8-21) concerning U.S. foreign exchange reserves, which are held in approximately equal portions by the Fed and the Exchange Stabilization Fund. The discussion began with a presentation by Samuel Cross, Manager for Foreign Operations, System Open Market Account, of the pros and cons of holding significant foreign exchange balances. On the negative side, Mr. Cross cited exchange rate risk, including unrealized but reportable losses on marking these positions to market in the Fed's financial statements. Addressing this problem, Chairman Alan Greenspan asked (p. 17): "Is there not any mechanism by which we can create swaps or RPs or something of that nature in which essentially we have fixed the exchange rate of our holdings?" In response, former Fed governor Wayne Angell suggested (p. 18): "You could have an exchange of puts. In effect, you could swap puts and thereby assume that somebody would ultimately want to exercise that added advantage." Mr. Cross then observed (id.): "It sounds like a forward exchange transaction." But that is not precisely what Mr. Greenspan had in mind. He replied (id.): "Well, the point at issue is that it's a [forward] exchange transaction that has a date on it. ... And effectively that gets factored into the market and neutralizes your position. What I'm thinking of -- and I just thought of it at this moment, so there might be plenty of reasons why not -- is an open-ended fixed- price mutual put, to put it in the terms that Governor Angell stipulated, so that we can eliminate part of the problem that is on the negative side of the current --" [sic, end of paragraph]. Then, just before the FOMC moved to the next topic on its agenda, Mr. Angell added (p. 19): "There's one slight addendum to this discussion: We have a reserve holding that costs us more money than what is reasonably in prospect to happen on foreign exchange rates and that is that we really are not a small reserve holding currency country. I think we actually have official reserves of $85 billion, Sam, compared to Taiwan's $75 billion. And if you mark our gold to the $358 price, we end up with something like $170 billion. 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." What are the "swap puts that just sit there" on the U.S. gold reserves? Certainly contracting parties could exchange or swap puts in the manner suggested by Mr. Angell. For example, a foreign central bank might receive the right to put a certain amount of its dollar holdings to the United States for gold at a specified price, in exchange for which the United States would receive the right to put an equal amount of its gold to the foreign central bank at the same price. In effect, the foreign central bank would obtain a call or option to buy gold, and the United States an option to sell gold, both at the same fixed price. However, taken in the context of the entire discussion, the swap puts on gold appear to be something different. Although I am not aware of any instance in which the words "swap put" have been used together as a noun, many exotic derivatives have been created in the over- the-counter market. Accordingly, the term may designate a special instrument designed for the Treasury, the Fed, or the ESF. While the term might in a colloquial sense be used to describe the unwound side of an existing swap, this usage would make a lot more sense if the swap possessed some sort of roll-over provision or, better yet, option not to unwind. In the latter event, exercise of the option would "put" or "stick" the swap to the other party by converting it into a completed sale. For example, the United States might enter into a swap of gold against U.S. debt securities with a U.S. bullion bank at, say, $350/oz. Rather than take the physical gold out of U.S. reserves, the bank might use it either to hedge gold borrowings from other sources or in a location swap with another large holder. But if the bank had an option under defined conditions to convert the swap into an outright sale of U.S. gold rather than a mere time-limited exchange, one might think of the arrangement a "swap put" or a swap with a put option attached. Like the previous example, this transaction would facilitate gold lending by central banks to bullion banks as well as encourage and support the use of derivatives by bullion banks to suppress gold prices. 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 rollover 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. What is more, it appears, and pretrial discovery will likely confirm, that these swap puts were indeed the gold swaps cited by the Fed's general counsel, J. Virgil Mattingly, in his 1995 statement to the FOMC : (www.federalreserve.gov/fomc/transcripts/1995/950201Meeting.pdf): "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." Thanks to the work of Mr. and Mrs. Rupert C. Raymond, two GATA supporters from Kentucky, their senator, Jim Bunning, released a memorandum from Mr. Mattingly to Chairman Greenspan dated June 8, 2001, in which the Fed's general counsel says in relevant part: "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." In an article entitled "GATA's smoking gun has real smoke," Tim Wood of www.theMiningweb.com so effectively undermines Mr. Mattingly's disavowal of his prior recorded statement that I have little to add. What should most concern officials at the Treasury and the Fed is that Wood, an outspoken skeptic of GATA, has nonetheless kept an open mind as good journalists do, suggesting that official denials of U.S. interference in the gold market are beginning to wear pretty thin with knowledgeable observers. Last October, the European Central Bank issued a paper entitled "Statistical Treatment of the Eurosystem's International Reserves. Part IV of this document contains an appendix with numerical examples illustrating how euro-area central banks should account for these transactions. The examples include three different types of gold transactions: 1) the purchase of 20,000 ounces from the Bank of England; 2) a one- month gold deposit of 10,000 ounces with J. P. Morgan in New York against U.S. government securities as collateral; and 3) a "gold swap with the United States Federal Reserve" in which the euro-area central bank swaps 1000 ounces of gold against US$300,000 in currency, with the transaction to be reversed one month later "at the spot price of gold prevailing in the market at that moment." The first two examples involve common transactions that are completely consistent with the known activities of the postulated counterparties. The Bank of England is selling gold. Morgan borrows gold, or takes gold deposits, which is fundamentally the same thing. A number of central banks outside the euro area engage in gold swaps. If, as Chairman Greenspan and Mr. Mattingly insist, the Fed never does so, either for itself or on behalf of the Treasury or the ESF, why did the ECB select the Fed as the hypothetical counterparty in its third example? It hardly seems likely that the ECB would choose for this example a counterparty with which no euro-area central bank had done a gold swap. On the contrary, the implication from the first two examples is that the Fed is the counterparty on a significant portion of the euro area's total gold swaps. Like his predecessor Lawrence Summers, Treasury Secretary Paul O'Neill -- eschewing personal responsibility -- delegates to underlings with no authority to speak for the ESF the task of denying any involvement by it in the gold market. In a letter dated July 16, 2001, to GATA's Chris Powell, Sen. Joe Lieberman passed along answers from John M. Duncan, the Treasury's assistant secretary for legislative affairs, to questions Chris had promulgated (http://groups.yahoo.com/group/gata/message/821). The two questions and answers of most interest and relevance are: 1) What are the "gold swaps" cited in the minutes of the January 31, 1995, meeting of the Federal Open Market Committee? Mr. Duncan's Response: "Treasury is not a member of the Federal Open Market Committee, and therefore no Treasury representative was present. Mr. Powell may wish to address this question to the Federal Reserve." 2) What "gold swaps" have been made by the ESF, the Treasury Department, or the Federal Reserve in the last 10 years? Whose gold was involved? What other parties were involved? What is the status of these "gold swaps"? Mr. Duncan's response: "There have been no gold swaps in the last 10 years." As evidence of U.S. participation in gold swaps accumulates, so do official denials of their existence. What thus emerges is a very disturbing picture: a decade of secret gold swaps starting prior to the Clinton administration and involving top officials from both major parties. The Anglo-American war against gold is being concealed from the American people by a bipartisan program of swapping lies -- first by Fed and Treasury officials with each other and then to members of Congress, who pass them along to their constituents. This procedure enables top government officials to avoid giving false public testimony before Congress while at the same time allowing the people's elected representatives to appear to be doing their jobs. But this stratagem notwithstanding, what official Washington wants to cover up may soon emerge as the greatest financial and political scandal in U.S history. -END- ------------------------ Yahoo! Groups Sponsor ---------------------~--> <FONT COLOR="#000099">Small business owners... 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