August 13, 2001. Gibson's Paradox Revisited: Professor Summers Analyzes Gold Prices

Due in no small measure to articles he wrote as a young economist, especially his 1966 essay "Gold and Economic Freedom" (reprinted in A. Rand, Capitalism: The Unknown Ideal, available online at, Fed chairman Alan Greenspan is widely recognized as quite an authority on gold. Far less widely known are professional articles on gold by another young economist who also went on to serve until quite recently in some of the nation's top economic policy positions.

Not long before joining the new Clinton administration as undersecretary of the treasury for international affairs, Harvard president and former treasury secretary Lawrence H. Summers, then Nathaniel Ropes professor of political economy at Harvard, co-authored with Robert B. Barsky an article entitled "Gibson's Paradox and the Gold Standard" published in the Journal of Political Economy (vol. 96, June 1988, pp. 528-550), available online at The article, which appears to draw heavily on a 1985 working paper of the same title by the same authors, is an excellent technical piece, revealing a high level of expertise regarding gold, gold mining, and the interconnections among gold prices, interest rates, and inflation.

Indeed, for any administration concerned that the bond vigilantes on Wall Street might thwart its economic policies by pushing up long-term rates at inopportune times, the article is must reading and qualifies its authors as attractive candidates for government service. Of even more interest looking at the Clinton administration retrospectively, the article provides strong theoretical evidence that since 1995 gold prices have not acted as would normally be expected in a genuine free market, but instead have behaved as if subject to what the authors describe as "government pegging operations."

Lord Keynes gave the name "Gibson's paradox" to the correlation between interest rates and the general price level observed during the period of the classical gold standard. It was, he said, "one of the most completely established empirical facts in the whole field of quantitative economics." J.M. Keynes, A Treatise on Money (Macmillan, 1930), vol. 2, p.198. And it was a paradox because contemporary monetary theory, largely associated with 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. Yet when Keynes wrote, data for the prior two centuries showed that the yield on British consols (government securities issued at a fixed rate of interest but with no redemption date) had moved in close correlation with wholesale prices but almost no correlation to the inflation rate.

Economists have long tried to find a theoretical explanation for Gibson's paradox. Professors Summers and Barsky provide the following executive summary of their contribution to this debate (at 528):

A shock that raises the underlying real rate of return in the economy reduces the equilibrium relative price of gold and, with the nominal price of gold pegged by the authorities, must raise the price level. The mechanism involves the allocation of gold between monetary and nonmonetary uses. Our explanation helps to resolve some important anomalies in previous work and is supported by empirical evidence along a number of dimensions.

They begin their article with an examination (at 530-539) of the data supporting the existence of Gibson's paradox, concluding that it was "primarily a gold standard phenomenon" (at 530) that applies to real rates of return. Regression analysis of the classical gold standard period, 1821-1913, shows a close correlation between long-term interest rates and the general price level. The correlation is not as strong for the pre-Napoleonic era, 1730-1796, when Britain effectively adhered to the gold standard but many other nations did not, and "completely breaks down during the Napoleonic war period of 1797-1820, when the gold standard was abandoned" (at 534).

Nor is the evidence of Gibson's paradox as strong for the period of the interwar gold exchange standard, 1921-1938, which was marked by active central bank management and restrictions on gold convertibility. Following World War II, the correlation weakened substantially under the Bretton Woods system, and "[t]he complete disappearance of Gibson's paradox by the early 1970s coincides with the final break with gold at that time" (at 535).

With the nominal price of gold fixed, Barsky and Summers note (at 529) that "the general price level is the reciprocal of the price of gold in terms of goods. Determination of the general price level then amounts to the microeconomic problem of determining the relative price of gold." For this, they develop a simple model (at 539-543) that assumes full convertibility between gold and dollars at a fixed parity, fully flexible prices for goods and services, and fixed exchange rates.

Next, they examine the response of the model to changes in the available real rate of return. In this connection, they observe (at 539): "Gold is a highly durable asset, and thus ... it is the demand for the existing stock, as opposed to the new flow, that must be modeled. The willingness to hold the stock of gold depends on the rate of return available on alternative assets." With respect to the gold stock, the model distinguishes between bank reserves (monetary gold under the gold standard) and nonmonetary gold, principally jewelry.

Summarizing the mathematical formulas of the model, Barsky and Summers make two key points. The first (at 540):

The price level may rise or fall over time depending on how the stock of gold, the dividend function [formulaic abbreviation omitted] and the demand for money [formulaic abbreviation omitted] evolve over time. Secular increases in the demand for monetary and nonmonetary gold caused by rising income levels tend to create an upward drift in the real price of gold, that is secular deflation. Tending to offset this effect would be gold discoveries and technological innovations in mining such as the cyanide process.

And the second (at 542):

The economic mechanism is clear. Increases in real interest rates raise the carrying cost of nonmonetary gold, reducing the demand for it. They also reduce the demand for monetary gold as long as money demand is interest elastic. The resulting reduction in the real price of gold is equivalent to an increase in the general price level.

Because the model is "essentially a theory of the relative price of gold," Barsky and Summers postulate (at 543) that "an important test of the model is to see how well it accounts for movements in the relative price of gold (and other metals) outside the context of the gold standard." They continue (id.):

The properties of the inverse relative prices of metals today ought to be similar to the properties of the general price level during the gold standard years. We focus on the period from 1973 to the present, after the gold market was sufficiently free from government pegging operations and from limitations on private trading for there to be a genuine "market" price of gold.

And they conclude (at 548):

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.

In other words, the bottom line of their analysis is that gold prices in a free market should move inversely to real interest rates. Under the gold standard, higher prices meant that an ounce of gold purchased fewer goods, i.e., the relative price of gold fell. Since under the Gibson paradox long-term interest rates moved with the general price level, the relative price of gold moved inversely to long-term rates. Assuming, as Barsky and Summers assert, that the Gibson paradox operates in a truly free gold market as it did under the gold standard, gold prices will move inversely to real long-term rates, falling when rates rise and rising when they fall.

To test this proposition, particularly for the period after 1984 not covered by Barsky and Summers in their 1988 article, Nick Laird has constructed the following chart at my request. Nick is the proprietor of, which offers an excellent collection of charts relating to gold and financial matters, and I am most grateful for his assistance. The chart plots average monthly gold prices on the inverted right scale, i.e., higher prices at the bottom. Real long-term rates are plotted on the left scale. They are defined as 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).

As the chart shows, Gibson's paradox continued to operate for another decade after the period covered by Barsky and Summers. But sometime around 1995, real long-term interest rates and inverted gold prices began a period of sharp and increasing divergence that has continued to the present time. During this period, as real rates have declined from the 4% level to near 2%, gold prices have fallen from $400/oz. to around $270 rather than rising toward the $500 level as Gibson's paradox and the model of it constructed by Barsky and Summers indicates they should have.

The historical evidence adduced by Barsky and Summers leaves but one explanation for this breakdown in the operation of Gibson's paradox: what they call "government pegging operations" working on the price of gold. What is more, this same evidence also demonstrates that absent this governmental interference in the free market for gold, falling real rates would have led to rising gold prices which, in today's world of unlimited fiat money, would have been taken as a warning of future inflation and likely triggered an early reversal of the decline in real long-term rates.

Other analysts have noted the inverse relationship between real rates and gold prices. An interesting and informative recent article along these lines is Adam Hamilton's Real Rates and Gold, which makes reference to a 1993 Federal Reserve study containing the following statement: "The Fed's attempts to stimulate the economy during the 1970s through what amounted to a policy of extremely low real interest rates led to steadily rising inflation that was finally checked at great cost during the 1980s."

The low real long-term interest rates of the past few years may have been engineered with far more sophistication than those of a generation ago, including the coordinated and heavy use of both gold and interest rate derivatives. By demonstrating that falling real long-term rates will lead to rising gold prices absent government interference in the gold market, Barsky and Summers underscore the futility of trying to control the former without also controlling the latter. But they do not provide a model for successful long-term suppression of gold prices in the face of continued low real rates.

What they do indicate (at 548), however, is that their model of Gibson's paradox accords only a "minimal role [to] new gold discoveries" and fails to account fully for shifts between monetary and nonmonetary gold. As they note (at 546-548), the fraction of the total gold stock held in nonmonetary form during the gold standard era was substantial, perhaps exceeding one-half, and the fraction varied over time. Also (at 548), "the post-1896 rise in prices, after more than two decades of deflation, is usually attributed to gold discoveries in combination with the development of the cyanide process for extraction."

Accordingly, they conclude (at 548-549) that their "proposed resolution of the Gibson paradox cannot be the whole answer" and that determination of "the quantitative importance of the mechanism in this paper would require better methods for proxying movements in the stocks of monetary and nonmonetary gold, and this might be an appropriate topic for further research." The unusual and sharp divergence of real long-term interest rates from inverted gold prices that began in 1995 suggests that Mr. Summers found an opportunity to do some further applied research on these matters during his tenure at the Treasury.

Both the heavy use of forward selling by mining companies and the World Gold Council's obsession with promoting gold as jewelry to the near exclusion of its historic monetary role appear designed to exploit the conceded points of vulnerability in the operation of the model. Viewed in this light, these two novel and distinguishing features of the post-1995 gold market appear less accidental and more as the handmaidens of the government price-fixing operations that the model reveals.

At the time of his appointment, Professor Summers was the youngest tenured professor in Harvard's modern history. On Friday, October 12, 2001, in outdoor ceremonies in Tercentenary Theatre, he will be formally installed as its 27th president, entrusted with the job of leading the nation's oldest university -- where "Veritas" is the motto -- into the new millennium. Three days earlier, in Courtroom No. 11 of the new U.S. Courthouse on Boston Harbor, the search for the truth about his interim service in the highest positions at the U.S. Treasury will resume.

Judge Lindsay has scheduled a hearing on the defendants' motions to dismiss for Tuesday, October 9, at 3:30 p.m. The underlying issue in that proceeding is whether the Constitution and laws of the United States may be enforced in a federal court action challenging the authority of Mr. Summers and other American officials, working at least in part through the Bank for International Settlements, to conduct the surreptitious and illegal gold price-fixing operations exposed even by his own academic research.

August 1, 2001. Swapping Lies: Fed and Treasury Officials Hanging Themselves

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 (

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. [Emphasis supplied.]

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 roll-over 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 (

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. [Emphasis supplied.]

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 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 Tim 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 BOE 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, Senator Joe Lieberman passed along answers from John M. Duncan, the Treasury's assistant secretary for legislative affairs, to questions Chris had promulgated ( 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.

July 20, 2001. Judicial Holding Pattern: Giving the Defendants Plenty of Rope

The clerk's office has advised me that the court is unlikely to hold a hearing on the defendants' motions to dismiss until fall. Although possible, it is also unlikely that the court will rule on these motions without first holding a hearing. Nor does it appear that the Bush team has any interest in trying to distance itself from the scheme to manipulate gold prices put in place by the Clinton administration. On the contrary, the new crowd in Washington seems just as determined as their predecessors to fight gold by any means available, fair or foul.

Price-Sensitive Outflows of Foreign Earmarked Gold Stabilize at 40 Tonnes/Month. Month-end balances of total foreign earmarked gold held by the Fed are reported in table 3.13 of the Federal Reserve Bulletin. (Selected articles from these bulletins are available online at; the monthly 3.13 tables can be found at

In discussing gold leasing by foreign central banks, paragraph 40 of the Complaint observes that from January 1995 through December 1999, foreign earmarked gold held at the Fed decreased by almost 1550 metric tonnes. What is more, during this period surges in outflows coincided with strong gold prices, apparently confirming that central banks were indeed leasing or selling gold to control its price. This pattern is shown graphically in two prior commentaries, The Fed: Up to its Earmarks in Gold Price Manipulation? and Central Banks vs. Gold: Winning Battles but Losing the War? The chart in the latter commentary carries the monthly figures on foreign earmarked gold in table 3.13 through March 2000. The figures since then are shown in the table below, which suggests that the central banks have not only increased their leasing and sales activities but also made them less obviously targeted to price increases.

                Earmarked Gold  Decrease from Prior Month
              ($mil.@42.22/oz.)    ($mil.)    (tonnes)

   April 2000          9711           0           0
   May 2000            9711           0           0
   June 2000           9688          23          17
   July 2000           9688           0           0
   August 2000         9674          14          10
   September 2000      9620          54          40
   October 2000        9565          55          41
   November 2000       9505          60          44
   December 2000       9451          54          40
   January 2001        9397          54          40
   February 2001       9343          54          40
   March 2001          9289          54          40
   April 2001(p)       9235          54          40

As is readily apparent from the foregoing table, starting in September 2000 monthly outflows of foreign earmarked gold stabilized at around 40 tonnes/month, a rate that seems to have been set in concrete since last December. While outflows no longer move in tandem with gold prices, the new constant rate of outflow represents a substantial increase over the past three years. For calendar 1998, total outflows amounted to 309 tonnes; for 1999, 302 tonnes; and for 2000, 355 tonnes. Annualized, the steady rate of outflow since last September approaches 500 tonnes, which is 100 tonnes more than the total annual central bank gold sales authorized under the Washington Agreement.

Although table 3.13 does not provide any indication of the specific central banks or international organizations responsible for these outflows, their size limits the possibilities. They almost have to be coming from one or a very few large holders. Three obvious possibilities are: (1) the International Monetary Fund, perhaps moving gold through the BIS as suggested in paragraph 41 of the Complaint; (2) a coordinated scheme organized through the BIS, possibly involving gold swaps with the United States; or (3) draw downs by Switzerland in connection with its program of official gold sales.

Fed Stops Reporting Gold Held by ESF. Paragraphs 62-64 of the Complaint identify instances of month-end discrepancies from 1974 through January 2000 between the Fed's gold certificate account, which by law must include certificates for all gold held by the Treasury, and the total U.S. gold stock, including gold held by the Exchange Stabilization Fund, as reported in tables 1.18 and 3.12, respectively, of the Federal Reserve Bulletin. By definition, these discrepancies reflect positive or negative month-end gold balances at the ESF, and thus necessarily imply corresponding gold trading activities by the ESF. (The monthly 3.12 tables can be found with the 3.13 tables at The monthly 1.18 tables are not available online; weekly figures on the Fed's gold certificate account are included in Release H.4.1, Factors Affecting Reserve Balances, available at, but this series does not contain month-end data.)

Table 3.12 "as corrected" in the February 2001 Federal Reserve Bulletin removed the four surviving discrepancies between it and table 1.18. These included adjustments to the figures for June 2000 and year-end 1997, 1998 and 1999. But the critical change was not to the figures themselves but to the relevant line item describing them. "Gold stock, including Exchange Stabilization Fund" as reported in prior issues was replaced by "Gold stock" without any reference to the ESF. In other words, the figures could not be changed without a change in description, proof that the earlier discrepancies were indeed on account of gold held by the ESF. Among the corrections made in February 2001 was the elimination of approximately $41 million of gold (approximately 30 metric tonnes @ $42.22/oz.) acquired by the ESF in December 1999, possibly reflecting its activities in response to the Washington Agreement.

Treasury Adjusts ESF's FY 2000 First Quarter Trading Results. Building on the discrepancies between the Fed's gold certificate account and table 3.12 including the ESF, paragraphs 65 and 66 of the Complaint allege that the ESF's poor trading results from 1997 through March 2000 were most likely due to its efforts to manipulate gold prices. During this period not only did the ESF deny making any interventions in the foreign exchange markets, but also its trading profits seemed to be associated with periods of weakness in gold prices and losses with gold price strength. Summary financial statements for the ESF are included the quarterly U.S. Treasury Bulletins, available online at Table ESF-2 gives the ESF's profits or losses (-) on foreign exchange, which is the line item that historically also included gold.

According to table ESF-2 in the June 2000 U.S Treasury Bulletin, the ESF incurred a loss on foreign exchange of $1,627,763,000 -- its third largest quarterly trading loss ever -- in the last calendar quarter of 1999 (first quarter of FY 2000). As the Complaint points out, given the sharp rally in gold prices following the Washington Agreement, these losses fit the pattern.

Somewhat oddly, and contrary to the practice in other years, the ESF-2 for the first fiscal quarter of FY 2000 also included a column entitled "Fiscal year to date, Oct. 1, 1998, through Dec. 31, 1999," which indicated a cumulative profit over these five quarters (which do not constitute a fiscal year) of $10,634,000. In the prior ESF-2, the ESF had reported a total profit for FY 1999 of $1,637,397,000, so that at first glance these cumulative figures -- however unusual their inclusion -- appear consistent with prior reports.

However, subtracting the reported FY 2000 first quarter loss from the total FY 1999 profit yields $9,634,000 rather than $10,634,000. Still, this $1,000,000 error hardly suggests that the columns in the ESF-2 for the first quarter of FY 2000 were erroneously transposed, with the cumulative figures for five quarters actually representing the results for the current quarter. Indeed, if the $10,634,000 were in fact profit for the first quarter of FY 2000, then the cumulative figure for the five quarters beginning October 1998 should have been $1,648,031,000, not a negative $1,627,763,000.

Nevertheless, without any explanation for the apparently egregiously incorrect ESF-2 for first quarter of FY 2000, subsequent ESF-2 reports for FY 2000 treat the $10,634,000 figure as profit for the first quarter. The ESF-2 reports for the second through fourth quarters of FY 2000 show quarterly and cumulative FY 2000 trading losses as follows: second quarter, current loss - $393,760,000, cumulative - $383,126,000; third quarter, current loss - $313,376,000, cumulative - $696,502,000; fourth quarter, current loss - $647,089,000, cumulative - $1,343,591,000. Thus by the end of FY 2000, the cumulative loss had grown to pretty near that originally reported for the first quarter.

The June 2001 U.S Treasury Bulletin contains the ESF-2 for the first quarter of FY 2001. It shows a foreign exchange trading loss of $57,589,000 for both the current quarter and the fiscal year to date. Why this practice was not followed in FY 2000 remains a mystery, as does the negative $1,627,763,000 amount reported in the ESF-2 for the first quarter of FY 2000. One possible explanation, particularly in light of the 30 tonnes of gold that suddenly surfaced at the ESF in December 1999, is that halting and reversing the gold price explosion precipitated by the Washington Agreement so overwhelmed the accounting resources of the ESF that it caused a bunch of reporting snafus.

A less forgiving explanation is that the ESF has purposefully tried to camouflage a large trading loss in the first quarter of FY 2000 by spreading it over subsequent quarters. In that event, the plan would have had to be conceived prior to the filing of the Complaint. It is not an impossible scenario.

I first pointed to a possible relationship between the ESF's trading losses and gold prices in an April 9, 2000, commenatary, The ESF and Gold: Past as Prologue? This commentary was not only included in GATA's Gold Derivatives Banking Crisis, but also actively discussed during GATA's May 10, 2000, presentations to the Speaker of the House and later to other government officials. They included one with close ties to the Treasury. He pointedly challenged the notion of any ESF involvement in the gold market. The ESF's originally reported $1.627 billion FY 2000 first quarter loss was also a subject of highlighted discussion in my commentary published July 11, 2000, "Ah! tenez, vous êtes de la merde dans un bas de soie."

Treasury Places Gold Reserves in "Deep Storage." My Consolidated Opposition to the various motions to dismiss, especially part 4 of the Statement of Facts (viz., Gold Swaps by the ESF), as supported by paragraphs 29 and 31-33 of my Affidavit, sets forth certain facts discovered after the filing of the Complaint relating to gold swaps by the ESF and the reclassification of U.S. gold reserves stored in the U.S. Mint's facility at West Point, N.Y.

The Financial Management Service in the Treasury issues a monthly Status Report of U.S. Treasury Owned Gold. (These reports are available online at The report for September 30, 2000, reclassified approximately 54 million ounces (1683 metric tonnes) stored in the Mint at West Point from "Gold Bullion Reserve" to "Custodial Gold Bullion" but made no similar change for almost 44 million ounces stored at the Mint in Denver. Gold at Fort Knox was classified only by location in both the August and September reports.

The reports for October 2000 through April 2001 remained unchanged from the September 2000 report. However, the following legend appears at the end of March and April 2001 reports: "Note: The information in this report has not changed since September 2000 due to changes in the U.S. Mint's reporting. For questions, contact Public Affairs at (202) 354-7222." So far as I am aware, no one at the Treasury has answered any questions regarding what prompted the September reclassification of the gold at West Point to "custodial" status, or more specifically, whether this changed status indicated that the gold had been committed to one or more swap transactions.

On July 2, 2001, the FMS posted the report for May 2001 (, which contained a revised format. Under "Mint Held Gold" appears a completely new category called "Deep Storage" followed by entries for Denver, Fort Knox and West Point and a "Subtotal - Deep Storage Gold" for over 245 million ounces stored in these three facilities. A note at the end of the report reads: "Deep Storage Gold - formerly called Gold Bullion Reserve or Custodial Gold Bullion Reserve. [sic] This gold is owned by the U.S. Government and held for safekeeping by the U.S. Mint at the locations listed."

This creatively named "Deep Storage Gold" accounts for almost 94% of the total U.S. gold stock (approximately 262 million ounces or 8150 metric tonnes), which has not been audited by other than government employees since the Eisenhower administration. As a consequence, there is no hard evidence to refute seemingly bizarre stories that surface from to time regarding the nation's gold reserves, such as large secret sales by President Johnson to fund the Vietnam War. Now another equally imaginative tale is developing online. It suggests that "Deep Storage Gold" is a euphemism for gold ore, and that some or all of the gold stock has been loaned or swapped against forward contracts by certain gold mining companies, e.g., Barrick and AngloGold.

The FMS's new reporting format also contains an introductory summary with only two line items: "Gold Bullion" in the amount of 258.6 million ounces; and "Gold coins, Blanks, Miscellaneous" accounting for the remainder of the total. So presumably "Deep Storage Gold" is not a reference to ore. Gold held in the vault at the N.Y. Fed or on display at Federal Reserve banks is also classified as "Gold Bullion." Why that more conventional nomenclature is no longer appropriate for U.S. gold reserves held at the Mint remains unclear.

What is clear is that government officials do not possess a reputation for integrity sufficient to obviate the need for periodic verification of the U.S. gold stock by independent outside auditors. However deeply stored, a full and complete audit of the nation's gold reserves by other than government employees is long overdue.

Secretary O'Neill: Straight-Shooter or Dissembler? On April 20, 2001, James Turk published an article, Behind Closed Doors (also available from as message 734 and message 735), speculating on a possible link between gold swaps by the ESF, perhaps with the German Bundesbank, and reclassification of gold bullion stored at West Point. This article apparently came to the attention of Congressman Ron Paul, who on May 22, 2001, engaged in the following exchange with Treasury Secretary Paul O'Neill at a hearing of the House Financial Services Committee on "The State of the International Financial System" (see

Dr. PAUL: I would like to know what is the connection between these two events, and what does this all mean. Do we have gold swaps with Germany, and could we have a little bit of transparency so I can better understand this process?

Secretary O'NEILL: Well, I will tell you, I would not probably be in a position to answer any of these questions except for the fact that on Sunday night when I was working through my briefcase, I found a report that it is my duty to transmit to the Congress providing the information on the most recent examination of the Exchange Stabilization Fund. Indeed, this was a fund set up in the Roosevelt administration in 1934 for the express purpose of protecting the American financial system from the vagaries of the rest of the world's finance systems. Just as you say, it is empowered to operate in gold and in currencies, and there is a substantial latitude as to how this arrangement can work [emphasis supplied].

My memory is that last year there was one transaction. It was a fairly small transaction involving an agreed intervention vis-a-vis the yen. It was the only transaction last year. I can assure you, and we will make sure you get a copy of this report, that I found the report really quite complete in its documentation of what was done in the past year.

The 1995 circumstance I don't know. In fact, the funds in the Exchange Stabilization Fund are marks and yen, and, if I can say it this way, attributed dollars. But the U.S. Government does still have gold reserves, and just by coincidence, Chairman Greenspan and I were talking about those reserves this morning, and it turns out by his best recollection, I didn't check because I assumed that his recollection is always right, but he was noting this morning that the U.S. holdings of gold are some $80 billion, which I observed is just about the same as Bill Gates' net worth, for whatever that is worth.

In any event, we will get you a copy of the Exchange Stabilization Fund report, and if there are additional details you would like to have, I would work with you to see if we can't get them for you.

Dr. PAUL: If I could follow up on this, thank you very much.

A lot could be said about Secretary O'Neill's response to Congressman Paul. For the present, I will confine myself to the following observations.

Unlike Treasury officials working under former secretary Lawrence Summers, Secretary O'Neill does not attempt to distance the ESF from any possible activity in the gold market. Rather, the italicized sentence at the end of his first paragraph adopts language very similar to that used by the Fed's general counsel, J. Virgil Mattingly, in his 1995 statement to the Federal Open Market Committee disclosing the ESF's use of gold swaps (

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. [Emphasis supplied.]

Secretary O'Neill's disclaimer of any knowledge of this "1995 circumstance" is not wholly persuasive. On May 25, 2001, three days after he delivered this testimony, the Department of Justice, with assistance from lawyers at the Treasury, filed a reply memorandum on behalf of Secretary O'Neill. Footnote 2 states:

The Secretary reiterates that the ESF has not since 1978 dealt in gold, including "gold swaps." In the event the Court denies any part of the Secretary's motion to dismiss, the Secretary intends to promptly file a motion for summary judgment, supported by sworn affidavits, demonstrating that the factual speculation upon which Howe's claims are premised is incorrect.

On the same day, with assistance from lawyers at the Fed, the DOJ also filed a reply memorandum for Alan Greenspan. So it was perhaps not "just by coincidence" that on the morning of Secretary O'Neill's testimony, he and the Fed chairman were discussing gold. Indeed, it is quite reasonable to suppose that they were in truth conferring about the reply memoranda soon to be filed on their behalf, and specifically how to handle the problem of the 1995 Mattingly disclosure as well as the FMS's September 2000 reclassification of the gold reserves at West Point.

For the record, at the London P.M. fix of $284 on the morning of their discussion, the claimed U.S. gold stock of 262 million ounces had a market value of $74 billion. A gold price over $305 is required to bring this amount up to Mr. Greenspan's $80 billion. Of course, as Secretary O'Neill noted, he did not validate this figure. Nor did he state the amount of the U.S. gold reserves in ounces or tonnes.

Secretary O'Neill also seems to confirm that the ESF's only intervention in the currency markets during FY 2000 was the coordinated and publicly announced G-3 intervention to support the euro on September 22, 2000, in advance of the G-7 finance ministers meeting in Prague. His reference to the yen in this connection may be an inadvertent error, or may indicate that the ESF used its yen reserves rather than dollars to buy euros. In any event, he says nothing to explain how this "one...fairly small transaction" produced significant trading losses at the ESF in the two quarters preceding it, or why it caused such a large loss in fourth.

Nor is it likely that Mr. O'Neill, when he arrived as CEO at Alcoa, would have let pass without notice a recent quarterly financial statement erroneously reporting a loss in lieu of an actual profit. And had he done so, he surely would have received sharp questions from his board or his shareholders. Cabinet secretaries and their overseers in Congress may operate by different rules than corporate executives and directors, but the shareholders of the United States are the American people. They deserve, should demand, and have every right to the truth about the ESF and the nation's gold policies, including a full independent audit of the U.S. gold stock by a major accounting firm.