Where’s the Audit?

April 30, 2007 – The US government claims that the Treasury Department owns and has in its possession 261.5 million ounces of gold, which is colloquially referred to as the US Gold Reserve. At the so-called “official” but patently bogus price of $42.22 per ounce, the book value of this gold is reported by the government to be $11.04 billion. The Treasury’s most recent report of its gold is available at the following link: www.fms.treas.gov

At various times for more than ten years I have studied the US Gold Reserve in order to determine its true status. Some questions I have posed include: Does the gold purportedly stored in US government vaults really exist? What can we rely upon to provide us with reasonable assurances that the gold exists? If the gold really exists, how can we determine whether it is US government gold and not gold held for other governments or their central banks?

There have been many more questions than these, but these three questions are sufficient I think to illustrate the skepticism with which I have time and again viewed the US Gold Reserve. I believe that a healthy skepticism is warranted, given the obfuscation and duplicity repeatedly demonstrated by the government when it comes to gold, such as, for example, the unexplained re-labeling of the gold reserve in 2001 first to “Custodial Gold” and shortly thereafter to “Deep Storage Gold”, an enigmatic title that itself raises doubt about the trustworthiness of government reporting. (See: “What Is Happening to America’s Gold?“)

Over the years others have also jumped into the fray, adding their view in an attempt to explain what is really going on with the US Gold Reserve. Some of these analyses have been pretty lightweight, but every once in awhile a serious analysis worth considering appears. One such analysis, written by Tom Szabo, was recently posted by GoldSeek, to view this analysis click here.

Mr. Szabo has reviewed recent audits of the US Mint, which were undertaken by one of the big-4 auditing firms, KPMG. The US Mint reportedly has custodial responsibility for the US Gold Reserve, and in order to make some basic assumptions about its true status, Mr. Szabo uses these Mint audits as a starting point.

Much of his analysis has merit, so Mr. Szabo’s analysis is worth reading. However, I am not in complete agreement with it. In my view, he appears to read too much into the KPMG reports, and consequently makes some untenable conclusions.

For example, he states: “…both the revised 2005 and the just-released 2006 audit reports include a clean audit opinion pursuant to which KPMG…has taken full responsibility for the audit of the gold reserves.” I think he is overstating the work undertaken by KPMG.

The US Gold Reserve is reported on the Mint’s balance sheet as “Custodial Gold”, and footnote #6 confirms the accuracy of this classification with the following statement: “As custodian, the United States Mint has responsibility for safeguarding much of the nation’s gold and silver reserves.” In other words, the Mint has custodial responsibility but not control of the US Gold Reserve. This point is explained in footnote #2, which Mr. Szabo does not mention in his report, but which I think provides the relevant information in order to describe the limitations of the scope of the KPMG audit.

Footnote #2 explains that some assets on the Mint’s balance are for its use and are therefore under its control, while some assets are not. Using the terms “Entity Assets” and Non-entity Assets”, the report goes on to explain this difference and concludes: “Thus, Treasury deep storage and working stock gold and silver are all considered non-entity assets.”

This explanatory remark means that KPMG did not audit the gold reserves. It performed an audit of the Mint, and the assets within the Mint’s control. It was not an audit of assets reported to be within the Mint’s custody but not under its control. For example, when a bank is audited, the examiners do not verify the custodial assets of customers stored in the bank’s vault.

So it seems clear from this differentiation between entity and non-entity assets that the US Gold Reserve was not verified by KPMG. It would be beyond the scope of the audit, which KPMG states is to review “the financial position of the Mint as of September 30, 2006…and its…custodial activity.” KPMG is not verifying the existence or quality or status of the custodial assets placed with the Mint.

What’s more, in general I am skeptical about the reliability of the KPMG report, for several reasons, including the following:

1) The standard achieved by KPMG is defined as follows: “The contract [for work to be undertaken by KPMG] required that the audit be performed in accordance with generally accepted government auditing standards“, which are not the same of those standards that would be applied to business enterprises.

2) KPMG also reviewed the Mint’s internal controls, but did not “express an opinion on the effectiveness” of them. More troublesome were the 41 redactions in KPMG’s letter, so it is impossible to determine whether the Mint’s accounting is reliable.

3) In its report on internal controls and recommendations to the Mint’s management, KPMG advises that the Mint needs to “Implement adequate security and physical control procedures to ensure that all assets [which presumably means the Mint’s own assets as well as custodial assets] are adequately safeguarded and properly accounted for“, which means that these assets are not presently meeting these basic requirements.

Nevertheless, on balance I think Mr. Szabo’s analysis is useful. It is, however, more a work-in-process rather than the final chapter of what has been an unending story. Even Mr. Szabo admits that point: “Can we really expect that KPMG will be present for the physical inventory at Fort Knox in 2007 and beyond? Well, I must admit that we won’t know the answer with absolute certainty for a few more months.”

Given the past record of the Treasury and its repeated unwillingness to be open and honest about the true status of the US Gold Reserve, I expect that we will be waiting for the truth for more than a “few more months”.