* * * There you have it. The ESF doesn't have to notify Congress about anything in advance. It is under the sole authority of the secretary of the treasury and the president, and they can do "gold swaps" without any congressional approval, which brings up an important point I made in "The Smoking Gun." I had noted a curious pattern in the correspondence emanating from the Treasury Department. The secretary of the Treasury never answered any questioning letters concerning the ESF, even if they were written directly to him. Rather, one of his assistants invariably responded. I therefore wondered whether the Treasury Department chain of command was being relied upon just as President Nixon had tried to rely upon the White House chain of command in an attempt to avoid being sucked into the vortex of a growing Watergate scandal. I even asked in "The Smoking Gun": "Did Secretary Summers' knowledge of the goings-on in the secretive ESF explain why his underlings, and not him, were writing the letters denying U.S. government involvement within the gold market?" The above excerpts from the FOMC transcript clearly establish that my question needs answering. It is becoming clear as more and more evidence emerges that the secretary of the treasury does not answer questions concerning the ESF because he, but not his underlings, knows to what extent the ESF is engaged in gold-related activity. His underlings can say that the ESF is not involved in the gold market because, as far as they know, what they say is true. However, we now have proof that the ESF is indeed involved in the gold market. So the secretary of the treasury does not respond to letters asking questions about the ESF and its activity in the gold market. He canªt answer them truthfully without spilling the beans. He obviously knows everything about what really is going on within the ESF, in contrast to his underlings. Or at least most underlings because it appears that one of them is in there up to his elbows washing ESF laundry. His name is Ted Truman. >From the FOMC transcripts it is quite apparent that Truman has a special role. Though recorded in the attendee list in the FOMC transcripts under the featureless title of "economist," he has a role that is anything but ordinary. The transcripts reveal that he clearly speaks for the Treasury Department in FOMC meetings and is very knowledgeable about the ESF. The insight displayed by him in the FOMC minutes makes it clear that he is not just fully informed about the ESF and its operations, but that he probably is also intimately involved in ESF decision making. Consequently, the following excerpt is particularly intriguing. * * * MR. PARRY. What is the size of the ESF? MR. TRUMAN. The usable funds in the ESF today, counting the foreign exchange as usable, amount to roughly $25 billion. MR. PARRY. Can you say how it is broken down? MR. TRUMAN. About $5 billion is invested in Treasury securities and the balance is roughly equally divided between marks and yen. I think they have slightly more yen than marks. MR. PARRY. Thank you. MR. BOEHNE. Is any of it obligated in any way beyond what we are talking about with Mexico? MR. TRUMAN. It is obligated only in the sense that they have one other swap arrangement with the Bundesbank. * * * Wouldn't it be interesting to know what this swap arrangement with the Bundesbank entailed? What is the nature of this swap? Is it a dollar/deutschemark swap facility? Or is something else being swapped, like gold perhaps? Gold being swapped with the Bundesbank? It's an outrageous thought. Or is it? I have already established that the ESF is very much involved with gold. The only thing I haven't established is with whom the ESF has those gold swaps that Virgil Mattingly was talking about. Let's put 1 and 1 together here to see if we can come up with an answer. According to Mattingly, the ESF has authorized gold swaps, presumably in the recent past (circa 1995). According to Ted Truman, the only outstanding swap facility of the ESF (circa 1995) other than the one established for Mexico is the ESF's facility with the Bundesbank. Therefore, the ESF has a gold swap facility with the Bundesbank. It's an interesting proposition, and one that fits well with another newly discovered fact. Some very interesting sleuthing by Mike Bolser, who has been assisting Reg Howe in his lawsuit against the Bank for International Settlements, has revealed that the Treasury has made a small but very significant accounting change. Mike noticed that the Treasury Department has changed the designation of nearly 1,700 tonnes of inventoried gold at the U.S. Mintªs facility in West Point, N.Y., which is approximately 21 percent of the total U.S. gold reserve, from "Gold Bullion Reserve" to "Custodial Gold." The August 2000 Status Report on U.S. Treasury-Owned Gold stored at West Point has a designation of "Gold Bullion Reserve." (See http://207.87.26.43/gold/00-08.html) But the September 2000 and subsequent status reports inexplicably designate this same gold that is stored at the U.S. Mint at West Point as "Custodial Gold." See http://207.87.26.43/gold/00-09.html This change was made without explanation, so rather than let the matter remain unexplained, Mike diligently contacted the Treasury asking what seemingly are two uncomplicated questions. Would the Treasury please explain why they made this change, and what does this change in designation mean with respect to the ownership status of the gold at West Point? They are simple questions, but perhaps they touch too close to a nerve. Not surprisingly, the Treasury so far has not responded to Mike. I have some views on what Mike discovered, and why the Treasury is so quiet about it. I think this change in asset classification is related to the ESF gold swaps. Hereªs my thinking. The change Mike spotted possibly occurred as a result of accountants looking at the financial statements of the U.S. Mint being prepared for its annual report ending fiscal year 2000. Note that the previous director of the Mint (Phillip Diehl) resigned in early 2000, so this was the first annual report signed by the new director (Jay Johnson). If there is one thing that government bureaucrats do well, they take great pains to call things by their right name. To do otherwise would put their job in jeopardy if something under their responsibility came under congressional scrutiny, and it was subsequently determined that the name assigned to something was incorrect or misleading. Therefore, this change in the descriptive label for nearly 1,700 tonnes of gold at West Point from "Gold Bullion Reserve" to "Custodial Gold" was purposeful. It happened for a reason. This conclusion is all the more plausible because the Treasury did not change the classification from "Gold Bullion Reserve" to "Custodial Gold" to describe the gold stored in Fort Knox or at the U.S. Mint at Denver. Maybe new U.S. Mint Director Johnson saw something he didn't like. What could that have been? I have already put 1 and 1 together to establish that the ESF has "gold swaps" with the Bundesbank. It therefore does not require much conjecture to add one supposition to the equation by concluding that the gold at West Point has been swapped with gold owned by the Bundesbank, thereby necessitating its reclassification from "Gold Bullion Reserve" to "Custodial Gold." Here's what I think has happened. The Treasury Department wanted to make gold available to some bullion banks. This statement is based on my premise that several of the big banks have gold books that are hopelessly imbalanced. By having borrowed short and loaned long, these banks have in their quest for profits imprudently fallen into the alluring but usually fatal banker's deathtrap -- a mismatched loan book. But what's worse for these banks, it is even more difficult and treacherous to try extricating themselves from this particular deathtrap because they haven't mismatched their loan book of dollars, which we all know can be created by the Federal Reserve out of thin air if dollars are needed to bail out banks from a deathtrap predicament. Instead, these banks have mismatched their gold book. And no one -- not even the Federal Reserve -- can create gold out of thin air. So given this reality about the nature of gold, the Treasury Department had to turn elsewhere to find the gold necessary 1) to keep these banks from defaulting on their bullion obligations arising from their mismatched gold books in an environment where metal had become increasingly difficult to come by, and/or 2) to keep the gold price low so that the likelihood of default by the banks would be lessened, even though metal would remain tight because fabrication year after year was exceeding newly mined supply. Rather than accept the bitter pill that certain banks were about to default on their bullion obligations, the Treasury Department looked for alternatives and found one -- they put their hand into the till, until recently known as the Gold Bullion Reserve at West Point. They swapped this gold with the Bundesbank. I'll explain how they did it, but let's first consider the practical aspects of this transaction. In all likelihood these particular bullion banks needed gold in Europe, where their obligations were originally established. There is very little gold lending in New York. It is a practical problem to ship the gold out of West Point without raising the alarm of government auditors. It is costly too. Also, it is likely that some of the gold in West Point is coin-melt from the 1933 gold confiscation. Even if it could be smuggled out of the West Point vault into the market without raising suspicions, the alarm bells would go off at the refiner and soon thereafter in the market because everyone knows that only the U.S. government has coin- melt bars. The appearance of coin-melt bars in the market would immediately raise suspicions that the U.S. Gold Reserve was being dishoarded, an outcome that the Treasury Department would obviously take steps to avoid in concocting its scheme because the U.S. Gold Reserve cannot be depleted without congressional approval. So one is faced with the practical considerations of overcoming these hurdles, but the answer is relatively simple. The Treasury has gold at 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 -- that is, the ESF lends this metal to bail out certain bullion banks. And the Bundesbank now owns the gold at West Point, which as a result was purposefully reclassified 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. The abnormally low gold price is the result of the proof that the ESF is deeply involved in the gold market. The ESF is involved in some 1,700 tonnes worth, because that is the weight of gold stored in West Point, which was probably being swapped at the rate of a few hundred tonnes per year from circa 1995 through 2000. There are two other tidbits that I would like to share with you that add even more validity to this supposition. First, a couple of months ago I was analyzing the 1998 and 1999 balance sheets of the ESF. As a former banker, I know a little bit about accounting, including where to find the big holes through which the proverbial truck can be driven. And I found one that could suggest that in these two years 975 tonnes of gold came into the market from the ESF. After reaching this conclusion, I wanted to test it. So I called a top gold market expert whose supply/demand analyses are second to none and who believes that gold from the U.S. reserves has been coming into the market for several years. Without telling him about my analysis of the ESF balance sheet, I asked him how much gold he thought came out of the Treasury/ESF in 1998 and 1999 in total. His response was 1,000 tonnes, a mere 25 tonnesª difference from what I had deduced from the ESF financial statements. When I told him that we had reached the same conclusion from different sources, he chuckled but was not in the least bit surprised, being so convinced that the Treasury/ESF has been a major source of metal for years. I have thoroughly reviewed his supply/demand numbers since 1994 and have determined that as much as 2,000 tonnes of gold from the U.S. gold reserve may have entered the market in order to make the gold price as low as it is, which leads me to the second tidbit that I would like to share with you. It is just as intriguing. This same individual told me several months ago about some astonishing intelligence he had learned from a source in Europe. He told me that the Bundesbankªs gold vault was empty, which seemed so preposterous that I found it hard to believe. He also admitted that this news startled him and that he did not have an adequate explanation for it. He knew that the Bundesbank was an active lender of gold, but he had a difficult time accepting the possibility that all 3,400 tonnes that it owned had been loaned. Yet he was confident that his source had provided him with accurate information. We now know what has happened. The Bundesbank has loaned 1,700 tonnes, half its 3,400 tonnes reserve; the other 1,700 tonnes were swapped for gold in the U.S. reserves, requiring the change in the West Point vault from Gold Bullion Reserve to Custodial Gold. In other words, the Bundesbank's vault is empty because half its gold is stored at West Point, not Europe, and the other half has been loaned out. Despite the proof that the ESF is involved in the gold market, two questions remain unanswered. First, what is the ESF's motive? Unfortunately, we just don't know for certain. Many, including me, believe that it is to use gold to provide the liquidity needed to bail out some big banks that have imprudently grown their gold books by expanding credit and mismatching their asset/liability maturities. These banks are the ones with the unusual -- some say abnormal -- derivative activities that are named as co-defendants in Reg Howe's suit against the BIS. That this list includes Germany's largest bank may explain why the Bundesbank would agree to participate in this gold-swap scheme. It was bailing out one of its own. Others believe that the ESF aims to manipulate the gold price to make inflation numbers look better than they really are, keeping the gold price artificially low. And there are some who argue that the U.S. government, acting at the behest and under the instructions of the big banks, aims to destroy their combined arch enemy -- gold, even though the gold mining industry would be destroyed along with it. This last theory is not outlandish. It has currency because gold is the only free-market money. In contrast to national currencies, all of which circulate only because of government fiat, gold derives its value from everyone who understands that it has usefulness as money. And governments and banks don't like that while they can manipulate gold for a time -- and as have we have seen in recent years, even a long time -- they cannot in the end control the price of gold any more than they can control the price of a Picasso painting. The value of a Picasso is determined by the free market, and so too is gold. In short, you and I give gold its value -- not the central banks, not the U.S. government, and not any other government, either acting alone or together. But the U.S. government either has not yet learned or refuses to admit that its power to
