Friday, August 11, 2017

The Fed and Gold

On August 11, 2017, the Wall Street Journal carried a front-page article on the Fed, raising a question of its storage of gold. In my latest book I provide much more information on this subject. The following is excerpted from my book The Impending Monetary Revolution, the Dollar and Gold, Second Edition:

After WWII when there were fears of an invasion from the Soviet Union, Germany—which was facing hundreds of thousands of Soviet troops just across its border—stored much of its gold in the U.S., London, and France. In 2012 the German federal audit office told legislators that the nation's gold in foreign storage had never been audited and called for this be corrected. In previous years, dating at least as far back as 2007, the German government requested return of at least part of its gold stored at the U.S. Federal Reserve Bank in New York but without success. The Fed refused to allow German representatives even to see their gold, offering instead a variety of excuses, including “security” and “no room for visitors.”
 
Eventually, visiting German officials were shown five or six gold bars and told these were “representative for Germany's holding.” But the gold bars were not numbered and allocated, so they could be shown to any number of banks as “their” gold. For years the Fed website stated “All bars brought into the vault for deposit are carefully weighed, and the refiner and fineness (purity) markings on the bars are inspected to ensure they agree with the depositor instructions and recorded in the New York Fed’s records. This step is vital because the New York Fed returns the exact bars deposited by the account holder upon withdrawal—gold deposits are not considered fungible.” (emphasis added). That message was withdrawn in 2014 and replaced with “page unavailable.”

In October 2012, Germany said it would repatriate 300 tons of its gold from the Fed. Three months later, in January 2013, it was announced that the U.S. and Germany agreed the U.S. would return 300 tonnes of gold to Germany in a series of shipments that would take until 2020 to complete. The U.S. would continue to store the remaining 1,236 tonnes of Germany's gold.

All this certainly gives the appearance the New York Fed did not actually have the gold. If the bank had it, why not simply give it to Germany instead of stalling and offering excuses? It was, after all, their gold. And why would it take 7 years to return 300 tons? It could be done in a week if necessary; certainly several weeks or even months would be more than adequate—but 7 years? Germany had previously repatriated 940 tons of its gold from the Bank of England without undue delay.

If the New York Fed bank did not have gold for Germany, it would have to buy it to repay Germany, and a large purchase would push up the price, which the bank certainly did not want. Or the bank may have the gold, but it may have been leased, hypothecated or encumbered in some manner so that it could not be transferred to Germany. These possibilities, too, would require additional time to unwind.

It is significant that back in 1999 a study by the International Monetary Fund found that central banks of 80 nations were lending out their gold reserves. The loans amounted to 15 percent of their gold. The central banks were operating as fractional reserve banks, not custodians.

In 1998 Fed chairman Alan Greenspan testified at a House Banking Committee, “Central banks stand ready to lease gold in increasing quantities, should the price of gold rise.” In other words, if gold prices go up, the Fed would make sure they come back down. Why? Apparently because of fear a rising gold price would weaken the dollar's exchange rate and the Fed's control of interest rates, but it would also discourage people from buying gold as an investment, which would also be negative for the dollar. In 2013, gold prices were much higher than in 1998, giving the Fed a stronger reason for knocking down the gold price. And Germany's request to repatriate its gold would be an even stronger reason if the Fed did not actually have all the gold it was supposed to have.

Most Americans would be incredulous that the Fed could be involved in manipulations that left it unable to honor its custodial agreement with Germany. But the European Central Bank website states, regarding statistical treatment of Eurosystem's International Reserves: “reversible transactions in gold do not have any effect on the level of monetary gold regardless of the type of transaction (i.e. gold swaps, repos, deposits or loans), in line with the recommendations contained in the IMF guidelines.” (emphasis theirs). Thus central banks are permitted to carry physical gold on their balance sheet even if they've swapped it or lent it out entirely

Perhaps as a reaction to criticism of its own lack of transparency and cooperation on the German repatriation, the Fed itself in September 2012 asked the Office of the Inspector General of the Treasury to audit the gold. This was to be an audit of gold in the Federal Reserve System and did not include Fort Knox.

The audit took place on September 30, 2012, and the Treasury Report on it is dated January 4, 2013. The report states 99.98% of all Fed gold is held at the New York Federal Reserve Bank. The remaining 0.02% is in coins at other Fed banks around the country. The audit found the New York Fed had 13,378,981.032   troy ounces of gold bars and 73,829.500  troy ounces of gold coins. Converting those troy ounces to metric tons results in a combined total of 419 metric tons. That's all. Yet Germany was supposed to have 1,500 tons of its gold here. And at least 60 other sovereign nations believe their gold is being stored by the Fed there, too.

Further doubt about whether the Fed actually has German gold is raised by the Fed's performance since it agreed in mid-January 2013 to repatriate 300 tons to Germany in seven years. In all of 2013 it sent Germany a paltry 5 tons. In 2011 when Venezuela decided to repatriate its gold from foreign banks, its 160 tons of gold were brought home in two months and five days, ending in January 2012.

Dr. Long Xinming writes that after WWII

The FED came to all countries in Asia, Latin America and Africa and told them their gold holdings might not be safe because of the war, and they should permit the FED to take all of it to the US for safekeeping. Many countries obliged, receiving FED gold certificates in exchange, but when they later tried to cash in those certificates and reclaim their gold, they were told the certificates were fake, that they contained spelling and other mistakes which the FED would never have made, and that the serial numbers were wrong. And the FED still has all that gold.…
Apparently a few people have been successful in presenting their certificates to the FED, with documentation that was irrefutable, but even in those cases the owners were forced to settle for only 1% or 2% of the actual value. And most other people or nations who attempt to redeem these certificates are arrested by the FBI for fraud – at the request of the FED.
Late last year, a Canadian businessman had some of these certificates and tried to use them as collateral for a loan, and the FED had him arrested, extradited to the US, and charged him with fraud. Insiders claim this is common practice to frighten every one away...
For many years after the war, the FED denied these transactions and even denied the existence of these certificates. But a crashed US military plane was found in the Philippine jungle with heavy wooden boxes full of metal containers, all with FED markings, and all containing hundreds of billions of dollars of these same certificates. That was when the entire story finally became public, but the Western media have never cared to report on it.

I have many photos of the content of that aircraft, of the boxes and the cans and the certificates, if anybody cares to see.”

The Fed says it is storing gold for more than 60 central banks, governments, and a few institutions such as the International Monetary Fund in 122 separate accounts at the New York Federal Reserve Bank. How many of these would have to request repatriation or audits of their accounts before an avalanche of similar requests will follow? If there is not enough gold to cover all accounts, no central bank will want to be one of the last to claim its share. There will be a run on the bank such as the world has never seen.

Hyperlinks are not available for sources in the above, but sources are referenced in the print version. Be sure to get the second edition of The Impending Monetary Revolution, the Dollar and Gold because it contains six new chapters not found in the earlier edition. Amazon, Barnes & Noble and other sellers offer only the first edition. The second edition is available only from American Liberty Publishers. (amlibpub.com)

Monday, July 31, 2017

What's Keeping the Stock Market UP?

Central banks are buying stocks. As you probably know, when the Federal Reserve buys bonds from the U.S. Treasury, it creates—out of thin air—a corresponding deposit in one of the large commercial banks where the Treasury has an account. The money from that deposit gets into circulation when the government spends it by buying something with it, for which the seller makes a deposit in his own account. The seller then spends the money from his account to buy something else, and the process of sales and deposits is repeated as the money is circulated in accounts throughout the economy.

The Fed is not the only central bank increasing its money supply in this manner. Other central banks are doing the same thing with their national currencies in the hope of stimulating growth in their economies. Japan is a prime example, having employed this and other “stimulative” policies for more than two decades with poor results. Those decades are called the “lost decades.” From 1991 to 2011 Japan's annual economic growth averaged less than one percent. It now has a debt-to-GDP ratio of 250 %, the highest in the world, and more than three times what it was (65 %) in 1990 when the first of its ten stimulus programs began. But that hasn't stopped Japan from trying larger doses of the same failed policies.

Shinzo Abe was elected prime minister of Japan in large measure on his campaign for monetary easing. In 2013 he said, “Countries around the world are printing more money to boost their competitiveness. Japan must do so too.” He called for more aggressive action along the lines of the Fed and the European Central Bank. That was his prescription for a degree of “needed” inflation to bring Japan out of two decades of economic stagnation and avoid the growing fear that deflation was now a greater threat than inflation. Whereas the Fed buys only U.S. Treasury securities, the central bank of Japan would henceforth buy at the market more than twice the amount of new bonds issued by its government, and it would buy not just government bonds but stocks, ETF's (exchange traded funds), and real estate funds.

Other central banks also broadened the scope of their buying, particularly for common stocks. After all, with near zero interest rates on government securities, buying common stocks at least offered the prospect of higher yield. The chart below shows how the five largest central banks raised their financial assets in ten years from less than $4 trillion to $14.6 trillion. This includes adding a record $1 trillion in just the first four months of 2017. Annualized, that would be $3.6 trillion for the year.

 

The bank of Japan is already a top-five owner of 81 companies in Japan’s Nikkei Stock Average and is on course to become the No. 1 shareholder in 55 of them by the end of next year, according to Bloomberg. And it owns 62 percent of the domestic ETF market.

Swiss National Bank purchased a record $17 billion in US equities in just the first quarter 2017, bringing its total US equity holdings to an all time high above $80 billion, 29% more than at the end of 2016.

Have you wondered why stocks like Apple, Microsoft and Google continue to make big gains in the U.S. indexes such as the Dow-Jones Industrials? These are the kind of big, successful companies that central banks favor. The Swiss National Bank bought almost 4 million shares of Apple in the first three months of this year. It owns more publicly-owned shares of Facebook than founder Mark Zuckerberg, whose holding is worth almost $24 billion. SNB also has over $1 billion each in Exxon Mobile and Johnson & Johnson stocks. SNB is the world's eighth largest public investor.

Until 1996 the Swiss constitution required the Swiss Franc to be 40% backed by gold. In 1992 Switzerland joined the International Monetary Fund. In 1996 an amendment to the Swiss constitution ended the Swiss Franc's gold backing, with the Swiss Parliament stating, “gold no longer has any meaning for monetary policy.”

Switzerland began selling its gold in 2000 when gold was just beginning a powerful 12-year price surge. Since 2000, the SNB has sold about 60% of Swiss gold reserves, about 1,500 tons. It is, therefore, perhaps surprising that in 2013 the SNB began quietly assembling a portfolio of gold and silver mining stocks, which in 2016 consisted of $1 billion of stocks in 32 mining companies. As of August 5, 2016, its two largest holdings were $186,092,033 in Newmont Mining and $157,318,092 in Goldcorp.