Letters from D.C.

August 5, 2002 – There has been a flurry of letters from the Federal Reserve and the Treasury Department responding to various enquiries about the federal government’s activity in the gold market. Not surprisingly, these letters make the same contention as other letters I have seen in the past – specifically, they contend that the federal government has not been intervening in the gold market.

The Fed and Treasury letters were written in response to enquiries by various supporters of GATA (www.GATA.org), who had contacted their Congressional representatives asking for them to investigate the evidence presented by GATA that the gold price is being managed by the federal government, working in concert with a few large bullion banks. Because these Fed and Treasury letters mention my name and some of my work, I am compelled to respond.

The letter from the Fed to Senator Christopher Dodd is the easiest to deal with. Written by Donald Winn, whose title is Assistant to the Board (sic), it states: “Contrary to Mr. Turk’s assertions, the Federal Reserve has not engaged in a gold swap with the Bundesbank.”

Interestingly, I have never asserted that the Fed has been engaged in gold swaps. I have always contended that the gold swaps are being made by the Exchange Stabilization Fund (ESF). This statement by Mr. Winn is therefore curious. It makes clear that Mr. Winn has not read my work, or alternatively, he is deliberately attempting to disinform those who read his letter.

Please keep an open mind about this last point. Before you conclude that the Fed would not deliberately attempt to disinform members of Congress or the public, consider the word game being played by Mr. Winn with the following statement: “As Chairman Greenspan has previously stated, the Federal Reserve owns no gold and therefore could not sell or lease gold to influence its price.”

This statement is accurate. The Fed owns Gold Certificates that give it a claim to the US Gold Reserve; it does not own bullion itself. But what’s important about this statement is what is left unsaid. We all know that the Fed does not own gold, but does it owe gold?

If the Fed borrowed gold, it would not own that gold. But that physical bullion it borrowed could be sold or leased to influence the gold price. Is the Fed doing that? Mr. Winn isn’t saying.

The Treasury Department letters are written by John Duncan, Assistant Secretary. The ones I’ve seen are identical, and I’ll use his letter to Senator Mitch McConnell for reference.

The letter starts well enough: “The article [“Accounting for the ESF’s Gold Swaps”] makes several assertions…I will respond to each of them in turn.” Unfortunately, as we’ll soon see, he doesn’t. But there is a bigger problem with his letter.

He implies that he has authority to speak on behalf of the ESF. In reality though, he doesn’t. Only the Treasury Secretary and the President have that authority. And neither of them will respond in writing to the evidence that the ESF is indeed engaging in gold swaps.

So this letter from the hapless Mr. Duncan should be ignored. It’s pure disinformation because he does not have any authority to speak for the ESF. But let’s take a look at it anyway because we’ll see from his letter that the disinformation campaign continues. It starts with his first comment.

Here is what he says I am asserting: “The Consolidated Financial Statement (CFS) indicates that the Exchange Stabilization Fund (ESF) has liabilities in the form of Special Drawing Rights (SDR) Certificates and of SDR allocations from the IMF. Information on this has not previously been published.” I have never said that this information had not been previously published. In fact, if it hadn’t been published, how would I have been able to analyze it in the first place? It is absolute twaddle by Mr. Duncan.

Mr. Duncan more accurately states the next assertion that he says I make. “The ESF exchanges SDR Certificates with the German Bundesbank in return for gold to put on the market through off balance sheet loans. This exchange is why the SDR Certificates disappeared from the ESF’s books.” That is my point precisely, and here is Mr. Duncan’s response.

“By law, the Secretary of the Treasury is authorized to issue SDR Certificates only to the Federal Reserve System. The SDR Certificates went off the ESF’s books because they were redeemed by the Treasury Department with the Secretary’s authorization. The visible result in the ESF’s balance sheet was a decline in the liability item for SDR Certificates and a corresponding decline in the asset item for the ESF’s holdings of U.S. Government Securities at the Bureau of Public Debt. The ESF redeemed the U.S. Government securities in return for dollars to use in redeeming the SDR Certificates from the Federal Reserve System.”

Perplexed? So was I when I first read this response by Mr. Duncan. It took me a couple of readings, but then I realized why I was perplexed. It is clear that there is no answer here to my assertion. All Mr. Duncan explains is the mechanics of how the SDR Certificates were redeemed. He does not explain why they were redeemed, nor does he explain what happened to the actual physical SDR Certificate after it was redeemed.

It has been my contention that the SDR Certificate was given to the Bundesbank as collateral after it was redeemed, and further, that this transaction would occur as an off-balance sheet item on the ESF’s financial statement. Mr. Duncan’s so-called answer to my assertion is in reality a non-answer. But non-answers are useful too.

I always assume that a non-answer is a ‘yes’. Mr. Duncan is being evasive. By giving a longwinded technical explanation, the casual reader may think that Mr. Duncan answered the question, and will then read on to the next point. But by not denying my assertion, Mr. Duncan leaves my assertion unchallenged. So I take his reply as a ‘yes’, that the ESF is exchanging redeemed SDR Certificates with the German Bundesbank in return for gold.

The third and final statement by Mr. Duncan to explain my assertions is: “The CFS [Consolidated Financial Statement of the US government] and the Treasury Bulletin report different amounts of foreign exchange reserves because the CFS presentation nets out foreign exchange liabilities.”

Mr. Duncan’s response here is interesting. “The difference reflects the fact that the Treasury Bulletin reports total U.S. reserve assets and that this total includes the foreign currency assets of the Federal Reserve System, which is not a U.S. Government agency and therefore is not covered in the CFS. The CFS covers only the reserve assets held by the Treasury Department.“

Some readers may not be aware that the Federal Reserve is not part of the US government. The Fed is privately owned, so Mr. Duncan is saying that it is not consolidated into the financial statements of the federal government. But that leaves unanswered the question as to why its assets are reported as US reserve assets in the Treasury Bulletin? Is it to make the US reserve assets look bigger than they would otherwise be if the Fed’s assets were excluded from the report appearing in the monthly Treasury Bulletin?

So again, we are left with more questions than answers. It need not be that way. All we need is for the Treasury Secretary or the President – who are the only two people with authority to speak for the ESF – to simply explain the evidence presented, compelling evidence that the ESF is engaging in gold transactions. Explain the evidence. It if is not related to gold transactions, then explain what it is.

By just explaining the evidence, the Treasury Secretary or the President could put an end to this so-called speculation that the ESF is engaging in gold transactions. It would be so simple for them. All they need to do is respond with a short letter to the member of Congress enquiring on behalf of his concerned constituents about the US gold reserve. A short statement to the press would do as well, explaining why the accumulated evidence is wrong and that the ESF is not engaging in gold transactions.

But nary a word from either the Treasury Secretary or the President denying that the ESF is engaging in gold transactions. I wonder why?