The Federal Reserve and Central Bank Gold Sales

By: Douglas V. Gnazzo | Wed, Jul 2, 2008
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Honest Money Gold & Silver Report

The Federal Reserve
&
Central Bank Gold Sales

"The more there is of mine, the less there is of yours."

Abstract

The long awaited meeting of the Federal Reserve is now history, another page in the annals of monetary debasement is etched into the record, a most hideous and shameful tale, one of wanton destruction to the purchasing power of the U.S. currency or dollar bill, a.k.a. Federal Reserve Note.

Since 1913, the U.S. dollar bill has lost 95% of its purchasing power due to excessive money and credit creation by the Federal Reserve. This loss of purchasing power is a loss of wealth; it is the reason why the U.S. has gone from being the largest creditor nation on earth to the largest debtor nation on earth.

This is the reason why it now takes two working incomes to support most families - one is no longer enough. This is why the U.S. savings rate is at historical lows. This is why health care, insurance, and college tuition bills have gone through the roof. This is why the price of oil is so high. And on and on the list continues - like a recurring nightmare.

An economy, financial system, or monetary policy is only as strong as the underlying monetary unit that is the basis of all markets. If the foundation is rotten, the edifice built upon it is rotten. It is merely physics on an economical level.

Gold or Paper

Paper money is debt; and one cannot pay off debt with debt. Debt can only discharge debt - not pay it off. Discharging debt is much the same as a bookie laying off risk - to another, any other, as long as it is no longer his risk.

Gold is no one's debt; it is no one's obligation, it carries no risk. Gold has been accepted by man as payment of debt since time immemorial, as gold cannot be controlled and printed or spoken into existence, as can paper money.

Paper money is a whore - an abomination that transfers wealth from the many to the few. This is why they who control the money power do not like gold, as gold does not bend to their ways - gold stands strong against the control of man, against excessive money creation and debasement that destroys purchasing power - that comes like a thief in the night.

FOMC Meeting

All waited with bated breath to here the wizards of finance proclamation to the people on interest rates. Would they raise or lower, or stand pat? They did nothing, which for the Fed is a monumental undertaking, as they usually screw things up quite well; although even in inaction there is action that may have harmful effects. The jury is still out.

As most are aware by now, the Fed has painted itself into a corner: they are damned if they do and damned if they don't - on more fronts then they care to admit. If they raise rates housing will take another mortal blow. If they lower rates inflation will be stoked to dangerous levels. What should they do?

Implement a new monetary system might be a good idea - the one the Constitution mandates: gold and silver coin and no bills of credit. Hard to do many say; no not really, it would actually be fairly easy. If they need some advice they can search here: Honest Money.

After their meeting the FOMC released the following press report:

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent.

Recent information indicates that overall economic activity continues to expand, partly reflecting some firming in household spending. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters.

The Committee expects inflation to moderate later this year and next year. However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high.

The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time. Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

A reassuring statement is it not? Notice the choice of words employed at a most significant cost: "the committee expects inflation to moderate; uncertainty about the inflation outlook remains high; should help; appear to have diminished".

But my favorite line was: "and will act as needed to promote sustainable economic growth and price stability".

That's the same line they've been using since 1913, the year they publicly walked on stage, the year they started debasing the dollar bill along its way to losing 95% of its value; all under their watch - a magnificent job to say the least: stewards to be trusted with the nation's future - destiny knows no bounds.

Central Bank Gold Sales

I have read recent speculation in the gold community concerning gold sales by Central Banks and the International Monetary Fund. Some say they will sell, some say they won't, some say it doesn't matters, others say it does.

One analyst states that there is not any possible collusion between the International Monetary Fund and the signatories of the Central Bank Gold Agreement over gold sales. I beg to differ. To believe in such is naïve at best and delusional at worst. When pigs can fly I will start to listen to such trivial pursuits of political butt kissing.

It is said that the only reason the IMF wants to sell any gold is to simply shore up its horrid financial structure. Oh really, and how does one know this? Are they privy to what the board discusses? And, lest not forget the "board" that is mentioned: without approval of the U.S. Congress - the board can do nothing - if the way things work is according to stated protocol - if, being the operative word.

If this is not enough to make one's eyes glaze over in sheer disbelief and astonishment, it is further posited that the IMF has agreed that they will not cause a ripple in the gold market waters, as they have promised to abide and work under the confines of the Central Bank Gold Agreement. Why, I think I just saw one of those pigs fly by.

Needless to say, the "confines" of the Central Bank Gold Agreement are of importance in all this - if, they are adhered to and followed, whatever it is they say and allow. So, let's take a look at what they say.

Central Bank Gold Agreement

Joint Statement on Gold
8 March 2004

European Central Bank
Banca d'Italia
Banco de España
Banco de Portugal
Bank of Greece
Banque Centrale du Luxembourg
Banque de France
Banque Nationale de Belgique
Central Bank & Financial Services Authority of Ireland
De Nederlandsche Bank
Deutsche Bundesbank
Oesterreichische Nationalbank
Suomen Pankki
Schweizerische Nationalbank
Sveriges Riksbank

In the interest of clarifying their intentions with respect to their gold holdings, the undersigned institutions make the following statement:

Gold will remain an important element of global monetary reserves.

The gold sales already decided and to be decided by the undersigned institutions will be achieved through a concerted programme of sales over a period of five years, starting on 27 September 2004, just after the end of the previous agreement. Annual sales will not exceed 500 tons and total sales over this period will not exceed 2,500 tons.

Over this period, the signatories to this agreement have agreed that the total amount of their gold leasings and the total amount of their use of gold futures and options will not exceed the amounts prevailing at the date of the signature of the previous agreement.

This agreement will be reviewed after five years.

The above press release states the working platform that the signatories have agreed to "confine" themselves to; restraint knowing no bounds it appears; but appearances can be deceiving - just ask Alice when she's ten feet tall.

It is comforting to note that the first line states that the purpose of the communiqué is to clarify the intentions of the signatories in respect to their gold holdings. Well, that sounds pretty straight forward, but is it?

First, I suggest that if something needs to be clarified, then it is presently not clear. So, from the get go, we know that we don't know the true story, as it needs to be clarified - brings to mind: oh ye of little faith.

Next, I point out that this statement is issued to clarify intentions in regard to gold holdings. Once, again it sounds pretty straight forward, but is it? I guess a lot would depend on just what exactly is meant by gold holdings.

Is anything to do with gold considered a gold holding, or just certain things? Are futures holdings, are over the counter derivatives holdings, is leased gold a holding, are swaps a holding; not to mention - just who is doing the holding, and does that matter? You bet it does, just ask Alice, even when she not ten feet tall.

Yes, I know - I have little faith, but then again I've studied history for a long, long time - almost as long as history has been around. I mean the Constitution of the United States clearly states that only gold and silver coin is money; and that no bills of credit (paper money) is to be accepted by states as legal tender.

Well, if one looks around we can see that just the opposite is the rule de jour: we have bills of credit, aka Federal Reserve Notes as money, and no gold and silver coin circulating as money; and hell, we've even got all the Central Banks and the IMF behind closed doors making secret agreements as to how and when they are going to sell gold, or do whatever it is they do behind closed doors. So yes, I remain skeptical at best, and with more than good reason - there are a plethora of reasons, just look up into the night sky - that one over there - that's draconis and he thinks he rules.

Now, let's take a look at the sentence that reads:"The gold sales already decided and to be decided by the undersigned institutions will be achieved through a concerted programme of sales over a period of five years, starting on 27 September 2004, just after the end of the previous agreement."

The gold sales ALREADY decided. Hmm, now what does that mean? Heck, it sounds like they've already decided on the gold sales PRIOR to the agreement; and you wonder why it needs clarification. P.T. Barnum would be proud. And, not to be forgotten: they consider gold in the vault and gold on loan to be worthy of the same line on their balance sheet.

And the best is kept for last, as the sentence that winds up the press release states: "Over this period, the signatories to this agreement have agreed that the total amount of their gold leasings and the total amount of their use of gold futures and options will not exceed the amounts prevailing at the date of the signature of the previous agreement."

What a bunch of nice guys, they have agreed that the total amount of their gold leasings (is this a gold holding?) and the total amount of their use (is the use of something the same as a holding?) of gold futures and options will not exceed the amounts prevailing at the date of the signature of the PREVIOUS agreement.

Hmm, something doesn't quite smell right does it? Now, how can we be sure of that? Let's see what the experts say in a press release put out by GFMS regarding the above press release by the signatories.

GFMS
Press Release
London, 13th October 2004

Leasing limits to remain the same

The second Agreement has maintained the status quo with respect to gold lending. The signatories to the first Agreement stated that they would not exceed the level of lending or use of forwards or futures then in place. This has been iterated in the Agreement of 2004.

This should not come as a surprise. With the reduction in the global hedge book and the expected continuation of that reduction there is little foreseeable likelihood of sharply increased demand for borrowed metal. Of course this can change in line with changes to market forces, be they internal or external and one must never discount the possibility of renewed short selling from speculators (which generallyinvolves a borrowing operation), of fresh hedge selling activity on the part of the mining industry (usually but not exclusively against project financing) nor from jewellers hedging their intake. The contraction of the hedge book, however and the low level of lease rates with gold effectively at full carry for as far out as one year, would certainly tend to suggest that there is no perceived need to raise the limits on lending.

I beg to differ, and I'm surprised, and I have a couple of questions I would like clarified.

If, it is true that there has been a reduction in the global hedge book, which would seem to be somewhat questionable, as over the counter derivatives are not reported with any transparency, but let's assume they are; and that there is a reduction in the foreseeable likelihood of sharply increased demand for borrowed metal, then why do the signatories need to have at their disposal the same total amount of gold leasings and use of gold futures and options available under the previous agreement?

If, the stated levels of demand for borrowed gold have dropped so drastically, then why do they need the same amounts of derivative insulation and manipulation power at their disposal? Maybe, it has something to do with the fact that "of course this can change in line with changes to market forces, be they internal or external..." - damn straight it can change, and has, and does. It is naïve to think otherwise.

The following are excerpts from a paper I wrote a few years ago on Gibson's Paradox, which GATA has done such great work in bringing forth into the light.

Gibson Revisited

On the chart, the 30-year U.S. Treasury bond yield minus the annualized increase in the Consumer Price Index (calculated as the sum of the monthly CPI increases for the preceding twelve months) defines real long-term interest rates.
The chart clearly shows that the inverse relationship between long term interest rates and the price of gold remained fairly intact until something funny happened around 1995, as the relationship suddenly diverged in the opposite direction of what it had been.

Interest rates and the price of gold are no longer running inverse to one another, but in the same direction - and the direction is down.

As real rates declined from 4% to 2% the price of gold dropped from $400 an ounce to around $270 an ounce. According to Summer's and Gibson's Paradox, the price of gold should have moved in the inverse direction - or up in price. So what happened?

Gibson's Paradox

Lord Keynes, in one of his more lucid moments, coined the term "Gibson's Paradox", in an attempt to explain the correlation between interest rates and the general price level observed during the years of the classical gold standard.

The reason it was a paradox is that Irving Fisher suggested that interest rates should move with the rate of change in prices, i.e., the inflation rate or expected inflation rate, rather than the price level itself.

Mr. Summer's has the following to say on the matter:

"The price level under the gold standard behaved in a fashion very similar to the way the reciprocal of the relative price of gold evolves today. Data from recent years indicate that changes in long-term real interest rates are indeed associated with movements in the relative price of gold in the opposite direction and that this effect is a dominant feature of gold price fluctuations."

The above translates into English as meaning that gold prices move opposite (inverse) to real interest rates - in a free market that is. Although free markets are doubtful, the rest of the thesis remains plausible, at least for a while.

The Fix

From the transcript of the minutes of the Federal Open Market Committee on March 26, 1991, the following exchange took place between Fed Governor Wayne Angell and Federal Reserve Chairman Alan Greenspan.

Chairman Greenspan: "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?"

Fed Governor Wayne Angel: "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. Greenspan: "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".

Mr. Angell: just prior to the end of the meeting said: "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."

Did You Catch That?

He said, "Swap puts that just sit there" on the U.S. gold reserves. Couple the above with the Fed's general counsel, J. Virgil Mattingly's 1995 statement to the FOMC:

"It's pretty clear that these ESF (exchange stabilizing fund) 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."

The Governor of the Bank of England was so frightened at one time that he stated:

"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."

Obviously, there is no chance in hell that any collusion is going on between any parties, privy or not - of council or not: hear no evil; speak no evil, see no evil - just keep yourself closed off to the light and you won't know a thing.

It is also fascinating to note that not only did the Bank of England not sign the second agreement, but neither did the Federal Reserve, the U.S. Treasury, the Bank for International Settlements, nor the U.S. Exchange Stabilization Fund. The biggest players did not sign in at the start of the tournament - a most interesting development. And just in case anyone is wondering about the power of credit swaps and other derivatives, just one glance at the following should allay any doubt:

Cui Warranto

Cui warranto is a fascinating term, it means by what authority. It is a good question to ask when anyone or thing wants to assert control or authority over your natural and unalienable rights as a human being. It's a fancy legal term for who died and left you king? Lest they forget - the reign of Kings is over.

Do central banks have the authority to make such an agreement as the Washington Agreement, and its sibling, the Central Bank Gold Agreement? Well, it all depends on what "authority" means. Does by what authority or warrant mean according to law - what law, whose law?

In the United States, the Constitution comes before all law, as all law must be in pursuance of the Constitution, or it is null and void, as if never passed - so the Supreme Court has ruled.

As far as international agreements go, for them to have any "color" of law they would need to be in accord with "international law".

International law is governed by treaties made between nation-states. Are central banks nation-states that can sign treaties? No, they are not. Then by what authority do they claim the right or warrant to make agreements about selling gold?

It is supposedly being offered as a noble thing, providing clarity for their gold agreements to sell - agreements, which, according to their own press release were ALREADY made prior to their meeting. The real purpose of the agreement is to allow them to speculate in the world gold market - nothing more or less - hell, what more could be needed?

As I stated earlier, one analyst goes so far as to say the only reason that the IMF wants to sell any gold, is so they can straighten out their financial house of disorder and mismanagement, and for no other reason; especially any type of collusion with Central Banks or other such heavy-weight players in the gold market. Yeah right, and my grandmother just got run over by a reindeer.

What do you think is one of the real reasons why the first set of gold sales were needed under the Washington Agreement: because the central and international bankers wanted to provide a means for the IMF to raise capital to help debt-strapped countries from going bankrupt - a euphemistic term for defaulting on their usurious loans made under the thumb-screw of the international banking elite.

The day after the Washington Agreement was signed the IMF announced off-market gold sales to raise money to finance its debt relief program. Go figure, who would have thought such a thing, was possible? Newsflash: if it walks, talks, and smells like collusion, it probably is; either that or coincidence knows no bounds.

Euro-land

This is where it really gets fascinating, or sad, or both - depending on one's perspective. Europe used to be composed on independent sovereign nation-states. Things are a wee-bit different now. Two very bright people, who had the help and support of very savvy council, have written an intriguing book called Regional Monetary Integration. In the book we read:

"When exercising the powers and carrying out the tasks and duties conferred upon them by this Treaty and the Statute..., neither the ECB nor a national central bank, nor any member of their decision-making bodies shall seek or take instructions from Community institutions or bodies, from any government of a Member State or from any other body. The Community institutions and bodies and the governments of the Member States undertake to respect this principle, and not to seek to influence the members of the decision-making bodies of the ECB or of the national central banks in the performance of their tasks."

"Further, the member countries of the EU must make sure that their national laws, including the statutes of their central banks, are fully compatible with this and other provisions of the Maastricht Treaty."

That last sentence is a dragon-killer of a statement, it almost sounds like national sovereignty has been done away with, but hopefully an expert at this stuff can write a reply and put it all straight. It brings a whole new light to the term supranational.

And now you know why England never joined, well, at least one plausible reason. And now you know why there couldn't possibly be any collusion going on, my goodness gracious - no - never in a thousand years, just ask that pig that just flew by; and look out for reindeer.

Why do they want to sell gold? Because they are scared of gold. Gold is real money. Gold is honest money. Gold is not debt, it is no one's obligation, it cannot be controlled.

Gold stays ever vigilant, watching their every move. The more the international bankers debase paper currencies, the more gold rises in value - sounding the warning to all who will listen.

They would like to silence its call, its warning - gold's warning that they are destroying our purchasing power and stealing our wealth. Listen to the sound resonate, listen to the truth. Listen to the call of gold - for honest money - for gold money.

Gold goes where no man fears to tread.

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Douglas V. Gnazzo

Author: Douglas V. Gnazzo

Douglas V. Gnazzo
Honest Money Gold & Silver Report

Douglas V. Gnazzo is the retired CEO of New England Renovation LLC, a historical restoration contractor that specialized in the restoration of older buildings and vintage historic landmarks. Mr. Gnazzo writes for numerous websites, and his work appears both here and abroad. Just recently, he was honored by being chosen as a Foundation Scholar for the Foundation of Monetary Education (FAME).

Disclaimer: The contents of this article represent the opinions of Douglas V. Gnazzo. Nothing contained herein is intended as investment advice or recommendations for specific investment decisions, and you should not rely on it as such. Douglas V. Gnazzo is not a registered investment advisor. Information and analysis above are derived from sources and using methods believed to be reliable, but Douglas. V. Gnazzo cannot accept responsibility for any trading losses you may incur as a result of your reliance on this analysis and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Individuals should consult with their broker and personal financial advisors before engaging in any trading activities. Do your own due diligence regarding personal investment decisions. This article may contain information that is confidential and/or protected by law. The purpose of this article is intended to be used as an educational discussion of the issues involved. Douglas V. Gnazzo is not a lawyer or a legal scholar. Information and analysis derived from the quoted sources are believed to be reliable and are offered in good faith. Only a highly trained and certified and registered legal professional should be regarded as an authority on the issues involved; and all those seeking such an authoritative opinion should do their own due diligence and seek out the advice of a legal professional. Lastly, Douglas V. Gnazzo believes that The United States of America is the greatest country on Earth, but that it can yet become greater. This article is written to help facilitate that greater becoming. God Bless America.

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