Tuesday, October 27, 2009

A Gold and Silver Crash Course

Considering the interest in the topic, I thought I'd take a minute to write a little of what I've learned about gold and silver, and the precious metals market in general, over the past few years. I'll try to make it as succinct, but that is not likely for me! Everything below is talking real metal, I'm not talking about gold ETF's (exchange traded funds), gold ETN's (exchange traded notes), gold stocks (in mining companies), or any other "paper" gold, as we call it (you can read about the nonsense of paper metal here, here, and here). I can tell you enough about that market to make you run from it like the plague. What I'm mean is real, physical, hold-it-in-your-hands metal. I'll start with gold.

Gold Basics
As Rollye James succinctly says, gold is sold as products. You can't just say, "I'll take one ounce of gold, please." Instead, you purchase it in the form of a product, and basically all the various products fall into either of two groups. The first group is bullion, the second group is numismatic. Bullion gold is generally worth only the melt value, which you can determine by checking out the spot price of gold. Because metals are traded in international markets, the spot price is constantly changing, 24-hours a day. You'll notice that some sites will update the latest price--for example, www.apmex.com, while others will post only the New York (COMEX) close--for example www.kitco.com/market. You have to know the spot price when you go to buy, because you need to know what the premium is on the product you're purchasing. Unless you're taking delivery on a 100oz COMEX gold bar, you're going to pay a little more the product than the spot price. Bullion gold might look pretty, and be shaped into nice rounds or pretty little PAMP Suisse bars, but when the rubber meets the road, serious people will only ever buy it from you for melt value, which is the market spot price, plus maybe a small ($20-$50 per ounce) premium for some bullion products if you're lucky. Remember that when you're assessing the premium on whatever bullion you're interested in.

The other category of investment gold, numismatics, is rather different because it is much more subjective and includes the "collector" element. Numismatic gold has both a collector value and a "property value" that knowledgeable gold people will pay a premium for. This premium might be a couple hundred bucks, or several million bucks. More on this later.

Bullion Basics
First off, bullion gold includes bars of various sizes and rounds. Rounds are sometimes called "coins" because some/most are made by federal mints (like the US Mint, Canadian Mint, Austrian mint, etc), but they are not technically "coins" because they are not legal tender insofar as their face value or paying taxes, etc. For example, the US Mint has been making gold and silver bullion rounds since 1986 (they stopped making gold coins as tender in 1933), and these bullion "coins" have a "face value" of $50 for the 1 oz gold rounds and $1 for 1 oz silver rounds. Obviously, with gold and silver several multiples higher in market price than $50 and $1 an oz, the face value is irrelevant, and the Mint itself can legally sell them for more than $50 each. For bullion gold, the US Mint sells produces the following products:

American Eagle (since 1986, cannot be purchased directly from the Mint)
Gold Buffalo (since 2006, only special fancy proof editions can be purchased from Mint directly)
Ultra High Relief St Gaudens 1 oz round (could be purchased directly from the Mint in 2009, but not anymore. This is a special commemorative that is a 24kt replica of the 1907 circulating gold coin, the St Gaudens Double Eagle $20, that ran until 1933. While it is technically a "collector's" item because of the single-year pressing, it's really a bullion coin with a heavy premium.)
Other collectible gold (varies throughout the year, I consider this bullion but some people disagree with that because they say its collectible; I can tell you one thing--they'd never get much over spot from me!)

The largest (and most popular) bullion rounds available from the US Mint contain 1 oz of gold. The Buffaloes and Eagles are sometimes available in "fractionals," which simply means "fractions" of an ounce: 1/2 oz, 1/4 oz, 1/5 oz and 1/10 oz are available, but fractionals are hard to find. Fractional gold is usually more expensive than the 1 oz versions, but some people think it is useful because of its smaller size (for bartering, or a quick sale, and also some people who cannot buy a whole 1 oz at once will buy fractionals when they can). Whether fractional or not, bullion should sell very close to spot. There will always be a little difference between the spot price and the sell/buy (aka "ask/bid" price), but as a good rule of thumb, you should try not pay more than 4%-5% over spot for bullion, which at these high prices is $40-$50 per ounce. You can often find it at under 4%. If you find yourself sneaking over that mark, consider carefully whether you will be likely to get that back if you have to sell. For examples, American Buffaloes routinely go for 8-10% over spot, but they often carry that premium well when its time to re-sell. Be careful.

Some people collect bullion products, and there is a little market for this, but I think that is not wise, personally. People pay well over the spot price (and melt value) of bullion products in these cases, and I think that is risky, because gold is already super expensive, and paying more for the "collector value" of bullion has not been supported by history. Numismatics are a different story, but more on that later. You might be wondering about confiscation: bullion is absolutely subject to confiscation under the current laws. It was illegal for US citizens to hold gold from 1933 all the way until 1973, and most people didn't even have the chance to buy gold in the US even after it was re-legalized in 1973 until 1978. The original illegalization of private ownership of gold was "authorized" by the Gold Confiscation Act that President Roosevelt signed by executive order shortly after coming into office in 1933. The order required all US citizens to turn in their gold and instead get back worthless paper notes: gold in bank safe deposit boxes was seized and replaced with paper, and individuals caught in violation of the order were federally charged. This order was later backed up by an actual law when Congress passed, and Roosevelt signed, the Gold Reserve Act of 1934. This Act also re-valued the dollar price of gold from $20 an ounce to $35 an ounce--in other words, now that the government had all the gold, they decided to make it worth more and hence the dollar worth less, and then promptly vowed it to the Federal Reserve System as collateral. Obviously, this was great for the Federal Reserve and the owner/member banks who now had all the American people's gold through the paper exchange agreement with the Treasury, but it totally sucked for the American people now holding only paper. Internationally, holders of dollars (foreign central banks, commercial banks, and even individuals) were able to exchange $35 of their paper dollars for one ounce of gold from the Treasury all the way up till 1971, but the American people could not. In 1971, after the disintegration of the Bretton Woods agreement (another story, but related), Nixon had to remove the US dollar from the gold standard entirely--but now I have to stop because I'm getting into a whole big discussion, and that is not the meaning of this introductory post! However, it is important background to mention, in my opinion, because the bullion law was never changed, and the government under the current law retains the right to confiscate bullion gold. According to the law, we have bullion at their discretion.

Since 1986, the IRS has also allowed gold/silver/metals in tax-deferred IRA's. But everyone knows the government can "do" whatever it wants, whether its legal or not, and they can change their minds, because the original gold confiscation was a totally illegal and unconstitutional violation of private property rights in the first place! I mention this, again, because its something that fits into understanding the overall gold/metals market. Also, I mention this because now you'll understand where numismatics enter the picture.

Numismatics Basics
Numismatics (pronounced new-miss-mat-ticks) are "collectible" gold coins. Simply, they are old. The US "numi's" ("new-meese") are all pre-1933 gold coins: $20 pieces, $10 pieces, $5 pieces, etc. The single-most important quality of numi's to non-collectors is that they are currently not subject to confiscation on the whim of the government. I'm not saying the government couldn't get all crazy and pass a "law" making all gold illegal or something, because they can, but I am simply saying that they would have to change the current law. Under the current law, the president alone could order a confiscation of bullion, but Congress would need to be involved in the confiscation/illegalization of numi's because the Supreme Court has already determined that the numismatics--because they have a "collector" value--are not simply bullion, but are antique and numismatic, and therefore they are "personal property" and not government property as currency, and so they are protected by the 4th Amendment's prohibition of property seizure without due process. (But again, this is a totally out-of-control government, so don't think the Constitution, or that "G-D piece of paper," as Bush called it, would stand in the way of anything). Because of this perceived confiscation exemption, their collectible value, and their rarity, numi's command a premium. A few years ago, it was manageable: you could get a certified 1920 $20 St Gaudens for maybe 10-15% over spot, and it might be a good choice. Things are a little different now, as many numi's are commanding a much higher premium (30-40%), even on fairly common old coins (like the Gaudens).

In my opinion, certification for numismatics is essential! A "certified" coin is one that has been examined, graded, and guaranteed by a third-party numismatic professional group. There are a handful of certifiers out there, but the only two certifiers that I trust are Numismatic Gaurantee Corporation (
http://www.ngccoin.com/) and Professional Coin Graders Service (www.pcgs.com). These are excellent and well-respected. DO NOT PURCHASE COINS "CERTIFIED" BY ANY OTHER GRADER until you have some serious experience! It very easy for a "certifiers" (many of whom at have declared themselves "experts" on eBay) to access a coin at some really high grade (for example MS-66), only for you to learn when you take it to the real certifiers that the grade is much lower, or, heaven forbid, that is actually a counterfeit. Certified coins are sometimes called "slabbed" coins because as part of the certification and guarantee process, the coins are placed in sealed "slabs" that are about the size of a playing card and 1/4 thick, tamper-evident plastic that includes a registration number and verification information with the certifier's mark. You cannot pop open a slab and hold the coin: the coin is protected inside and its grade is guaranteed only as long as its inside there. The coin is clearly identified and labelled with a bar-code and certification number. You can check the certification number right on their websites (PCGS and NGC). Besides the authentication and before the slabbing, the other part of the certification process is called grading. Grading produces a "quality grade" for the coin, from poor (a really, really, really bad looking coin) to perfect uncirculated MS-70 (a perfect coin, no flaws). You can read more about grading on this link.

Personally, I think unless you're getting into collecting for collecting (which is ridiculously expensive with gold!), the finest slabbed coin anyone should be throwing money down on is a MS-63 ("mint-state 63, in a scale from 60 to 70 where 70 is perfect). At least at these prices, because it is ridiculously expensive territory. There is usually only a small difference in price from the MS-61 up to the MS-63's, but once you move from MS-63 to the MS-64's, you're getting into some serious price changes. Get up to 65 and 66's and 69's, and you're talking thousands of dollars over spot price. That is serious collector territory, not investor/survivalistic stuff. (That said--if you have the chance to get a high-grade, verified coin at a good price, do it!) For example, right now I just checked
the prices on random dates $20 St Gaudens. This is a coin with .9675 oz fine gold, and so a melt value of about $1008 at current prices. Of course, you would be out of your mind to melt a $20 Gaudens simply because they are beautiful and more valuable because they are old, more rare than bullion, numismatic (even if they are in poor condition) and people like them--but if you did, you're looking at $1008 spot. Here's the current (October 27, 2009) price difference for various grades on slabbed (PCGS certified) Mint-states of the same $20 St Gaudens Double Eagle:

MS-62: $1525
MS-63: $1655
MS-64: $1830
MS-65: $2230

As you can see, you're quickly up to over twice the spot price of the gold content of the numi's. If you are looking just for quantity, then you can have two bullion gold 1 oz American Eagles for the price of one MS-65 slabbed numi Gaudens, and have some change left over. The high premiums on these numi's is something that really started about 14 months ago, and its been supported by people apparently buying them, because they do still move quickly. That said, twice the price? C'mon. That's for collectors, and that is more risky that regular gold stuff too.

As you could see from the pictures in the links above, the obverse (front side) of the St Gaudens $20 pre-1933 coin looks like the obverse of the modern American Eagle US Mint bullion round. It is the same design, but the reverses are different. Don't mistake an American Eagle bullion piece for an old Gaudens when you're looking at things online. Make sure they are clearly identified. Other US numi's include the design on the $20 piece that came before the Gaudens design, which was called the $20 Liberty (by the way, its called a "St Gaudens" because that's the lastname of the man who designed it. The official name for a $20 US gold coin was a "double-eagle", a $10 was an "eagle," a $5 was a "half-eagle," etc.) There are $10 coins that contain about 1/2 oz of gold ($10 Liberty til 1907, and then the $10 Indian after), and $5 coins (about 1/4 oz). These are more expensive numi's, and also have a collector value that elevates their price. So that's some of what you need to know about numismatics. Now for something that applies to bullion and numismatics: purity.

Understand karats. The karat system refers to gold purity, and you might encounter it in your research. You have heard of it before when you hear "24kt gold" or "14kt gold", etc. Karats are an ancient unit of measure originally based on seeds, and the karat system is meant to show how much of the weight of any "gold" item is due to gold, and how much is another metal. For example, a solid gold item is 24 karat gold because it is pure gold, nothing else added. You can take a 24kt gold item and place it on a scale to see its weight, and you don't have to subtract anything for the alloy metal because it is 100% gold. You will also see 24kt gold marked as .999, which is how you'll see it on bullion usually. Gold purity moves down from 24Kt if another metal is added, making the gold an alloy. Because gold is so soft and malleable, it is very common to have another metal, usually copper or silver, introduced in small amounts to strengthen it. This is where the karat system comes in. For example, a 14kt gold ring that uses silver as an alloy will have 14 parts of gold for every 24 parts of weight: so if it weighed 24 grams, then you'd know that only 14 grams of that is actually gold, and the other 10 grams would be silver. That 14kt "gold" ring is actually only 58.3% gold. A ring of 18kt gold would be 75% gold, etc. In bullion, nearly all bars are 24kt and most rounds are 22kt (91.6% gold) or better. The US Mint makes one 24kt gold round, and that is the
Gold Buffalo, which is a solid ounce of gold. The Ultra High Relief St Gaudens replica is also 24kt, but that is a limited time thing intended for collectors. This is where you should not be decieved by the size of a coin unless you know the karat. For example, the very popular US American Eagle gold is 22kt (91.6%) gold, and its bigger than the American Buffalo. BUT, since it is 22kt, it is 91.6% gold and 8.4% alloy metal, the bigger size and heavier overall wieght is from the additional mass of the alloy metal, not from more gold. The American Eagle does not contain any more gold than the Buffalo: they both contain the same amount, 1 troy oz. This is not super important, because even without physically wieghing the coins, you can be assured of their content if you have US gold coins (whether numi's or bullion), but I think that people should know about karats.

The US Mint is the most trusted mint on the planet. Other good mints are the Canadian (they make the gold Maple Leaf), Austrian (Philharmonics), and then the Chinese and Australian mints. US gold is the easiest to move. As far as karats and purity, all US numismatic gold US coins (pre-1933) are alloys of gold and copper because they were meant for circulation, and 24kt gold would not have been strong enough. Also, the alloy makes them easier to strike a fine image on them that will stay. These US coins are 90% gold and 10% copper, and therefore have a gold purity of 21.6kt (24kt x 90% = 21.6kt). Again, that means that when you weigh the coin, you must realize that 90% of that total wieght is gold, not 100%. So, for example, a 1930 $20 St Gaudens will weigh more than 1 oz on the scale, but only 90% of that weight is gold. While these coins are generally referred to as "one ounce" coins, they actually contain a little less than 1 oz, .9675 oz gold, but since they are numistmatic, most people aren't looking at them simply for the melt value. The coins are bigger than any modern US bullion coin, such as the American Eagle and the Buffalo, and they are bigger than the "replica" verisons currently being made by the Mint because that coin is 24kt. Now you understand karatage, and a bit about gold generally.

Silver Basics.
And now for silver. This is much more simple. Silver was in US quarters, dimes, halves, and dollar coins until 1965--these coins were 90% silver. Coins dated 1965 and higher do not contain silver, with the exception of 1965-1967 Kennedy halves, which were 40% silver. Nickels do not contain silver, with the exception of "wartime" nickels dated 1942-1945, which contain 35% silver. Your choices for silver purchases are US or foreign coins (called "junk silver" because it is 90% coins in circulated condition) or bullion.

"Junk silver" is not junk at all, and it's often more preferrably called "coin silver," but you'll see "junk silver" online a lot. The hardest part of buying coin silver is paying $120 dollars for a $10 role of 1960 quarters! But that's what happens. In my opinion, coin silver is important to have, because you can have dimes, quarters and halves that are in a small fractionals should you ever need to use it to barter or trade in an emergency. It is easily recognizable, and you cannot counterfiet the sound of coin silver without silver, nevermind the US Mint stamps that made the coins 45 or more years ago. Another quality of US coin silver is that, of course, the coins are still legal tender in the US, so they are "worth" at least their face value, say, for example, the government outlawed silver or something. (And you answer your next question--yes, I'm that crazy.)

US silver coins are a good way to investment in silver, in my opinion. But like I said, it feels strange to pay $120 for $10 roll of quarters. It makes you think, too, exactly what the Federal Reserve has done to our currency. Anyways, when you're wheelin' and dealin', you need to be able to confidently determine the silver content of what you are buying, because there are different methods for selling. For example, if you purchase by "face value" or by a certain weight (ie, five pounds of silver coins), you need to be able to know the silver content so you can set your price parameters. Here's how to calculate that.

For coin silver purchases based on the face value, the industry standard for circulated coins is 0.715 oz silver/$1 face for quarters, dimes, and halves (they contain .723 by statue, but it wears down a little during circulation). In other words, $1 of quarters, dimes, or halves (in whatever combination: 2 halves; 4 quarters; 2 quarters and 5 dimes; 10 dimes; etc) in circulated condition contains 0.715 oz of silver. So, $10 face value would have 7.15 oz silver. If the price of silver is $17/oz, then you multiply that out: $17 x 7.15 = $121.55. The silver in $10 face of silver coins is worth $121.55. (The silver content in the dollar coins is a little higher: its about .77 per $1 face, which would be one coin, and they are also worth a little more because people like them better and they are less common). The industry will use .715 for a mixed assortment of dimes, quarters, and halves.

For coin silver purchases based on the weight, it is usually because you're buying several pounds. First and foremost, make sure that you and your seller agree on your unit of measure, because in metals there are two types of "pounds." The regular pound, which is the standard, or avoirdupois pound that we are all used to which, has 16 av ounces, while the troy pound, which is unique, contains 12 troy ounces. You will see the word "troy" in reference to metals because it is the official unit for gold and silver and other metals. A troy ounce is a little more than a regular ounce, but a troy pound is less than a regular pound. Make sure that you have the deal set on regular pounds, and if for some reason your seller doesn't want to do that, I would just walk away right there, because he's being stubborn. The troy pound is no longer used in metals, only the troy tounce, so if someone starts talking troy pounds, you can guess that they are trying to short people and fool them. Anyways, so have the deal set in regular pounds, so you know there are 16 ounces per "pound" you're buying.

In the weight-based purchased, you use the 90% silver rule, because remember, only 90% of the wieght of the coins will be due to silver. For example, 20 lbs of silver coins will be 90% silver, or 18lbs silver. Don't worry about pricing the other 2 lbs because that's mostly zinc or nickel, so you should be concerned only about the silver content you're getting. Since there are 16 ounces to a pound, you take the pounds of silver and multiply them by 16 to get the total ounces: 18 x 16 = 288 regular ounces of silver. You then have to account for the move from regular (avoirdupois) oz to troy oz, which is 9.11% heavier than the av oz, because the pricing for silver is in troy oz. Because the troy oz is heavier and the av oz, if you do not compensate for this change, you will be shorting yourself because you'll think you're getting more silver than you are (but your av ounces will convert to less troy ounces). Therefore, simply reduce your 288 regular ounces by 9.11% and you'll have the troy oz equivalent: 288 x .0911 = 26.24 oz to reduce, 288 - 26.24 = 261.76 troy oz. Round up to 262 ty oz.

You then take the current price of silver (we'll use $17/oz again) and do the math: 262 ty oz x $17/ty oz = $4,454. You would expect to pay $4,454 or less for that 20lbs of 90% silver coins. In case you're wondering, there is a way to convert that information back over to an estimate of the face value using the information above: you take your troy oz of 262 and divide it by the industry standard 0.715 ty oz silver content per $1 face US coins, and you'll get an estimate that your 20lbs of silver coins will have a face value of about $366 or so when you get around to counting it. Just for perspective, 20 lbs of silver doesn't take up much space. A $1000 face-value bag of silver coins weighs about 54 lbs and is about the size of a football, but will run you $12,155 or so (715 ty oz x $17/ty oz = $12,155) at today's prices. Junk/coin silver is also good because it the most likely form of silver to be priced at or near spot, and sometimes you can bargain for below spot, especially if the person bought it when silver was at $6 an oz! I like US junk coins, personally.

As for silver bullion, it is much easier than calculating all that, because you just buy what you want in troy oz and that's it. Silver bullion is usually .999 silver, and will be marked as such. "Sterling" silver is 92.5% silver, and this is not used in bullion that I have ever seen--But if you find real silverware at a thrift store, by all means, get it (its usually marker "sterling" or ".92" or something)! The bullion products vary from 1 oz bars, to 5 oz bars, to 10 oz bars, to 100 oz bars, to rounds, and all kinds of stuff. There is really a lot of great bullion silver to choose from. You'll notice as you look (for example,
APMEX has a great silver selection) that there is bullion from federal mints, including the US Mint and Canadian Mint, as well as bullion in bars and rounds from private mints, such as Sunshine Mint, APMEX, Englehard, Wall Street Mint, etc. These private mints are simply places that buy silver (and other metals) and make their own rounds to sell. It is a good way to buy silver, I think, because often you can get something from a private mint for $.49 over spot, which is a good deal. Be sure to mind the price over spot, because that premium is so important. Don't go buying some bullion and paying $5 over spot because you think its pretty. This is business--if you are serious and you are buying in bulk, don't worry about what it looks like, worry about getting as much as you can for your money before the banksters take over!

There's nothing wrong with maybe buying one coin that's cool or whatever (I have a couple that I just thought were cool, but I still didn't pay $5 over spot!), but don't make that an investment strategy because you'll be shorting yourself. I've seen places trying to sell 1 oz rounds for $4 over spot, or more. That is insane--that means you pay the $17 for the spot price (or whatever it is that day), and then have to fork over another $4 to get the product. What--a 23% premium on bullion?! Keep it as close to spot as possible to get as much silver as you can when you make a purchase. There are often sales at places like APMEX that will have some silver bullion item at a very low price over spot. In fact, a few weeks ago, APMEX was selling the junk/coin silver US coins for $.10 under spot, which they were able to do that because of the big move silver made. Bars and regular rounds from good private mints are fine. The US Mint American Eagle Silvers (which look like the Walking Liberty lady on one side but have a different design on the other) are very popular, but they will have a little premium. Right now they are $1.89 over spot at APMEX, which is about as low as you will find them anywhere. Those rounds are good because, like the junk/coin silver, they have instant recognition with anyone who knows silver, as well as those who don't, because they are extremely nicely stamped coins that bear the US's name on them, and while they are always a bit over spot, they do seem to hold onto that premium even when people are selling them on ebay (which is a good place to gauge the market's resistence to any premiums). But realize that you're paying a premium, so you might want to look around for something else that might suit your needs. There are many choices, and I personally do recommend
APMEX for silver bullion, but I think you can get a better deal on junk/coin silver on ebay or through a dealer. Don't be pressured by dealers: hang up on them if they start doing the pressure business!

Well, I hope this was helpful for you. I was going to write a little about platinum and palladium, but this is already way too long! I'll follow-up with that some time later. Please make sure to research this stuff and get confidence about it before making any kind of major moves. Do not let dealers pressure you--period! Know your stuff, and look out for yourself.

Wednesday, October 21, 2009

Monetary Gold, SDR's and the BIS

(originally composed October 21, 2009.)

I've been looking a bit more into the gold swaps issue, and seeing as that is a central bank thang, I have, of course, found myself today wasting another otherwise good day patrolling the Bank for International Settlements' website (www.bis.org). I am quite used to gasping for air as I word-search various documents in the voluminous records at the BIS, and I have to say everything was going just fine--just fine, that is, until I ended up snuggled between gold, SDR's, and the IMF.

Let me start slow. Specifically, I have recently embarked upon reviewing the BIS IFC's (Irving Fisher Committee on Central Bank Statistics) new 2009 document titled, "
Measuring Financial Innovation and its Impact" (warning, pdf, 538 pgs). This multi-author, multi-section report goes into great detail about a lot of things, from the derivatives disaster to the housing market in Netherlands, but the reason I was looking at it was to find one section in particular. The section starts on pg 58, "Integration of new financial developments into the new worldwide statistical standards," by Reimind Mink.

As the title suggests, this report considers the challenges that have recently developed due to "liberalisation" of the financial regulatory scheme, globalization, and securitization, and discusses options for how to integrate all the different national systems used by various countries throughout the world to determine a more "uniform" idea of what's an "asset" and what's a "liability." I was mildly surprised to see that the BIS even cared about making such a distinction, but I digress. From the report, the first table is a depressing set of data on issued debt securities, and it goes on to analyze how an "asset" or "liability" should be reported to conform with ever-changing globalization "standards" originally set forth in the System of National Account standards (SNA), which are now giving way to the new International Financial Reporting Standards (IFRS). It’s actually a very interesting read, because there is a frank (if accidental!) presentation of the lunacy of the debt/securitization scheme and resulting derivatives, and risk transfer is discussed at length. But that's not why I mention it: I mention it because it talks about gold. "Monetary gold," to be exact. There are a few references to it, and the last one is most critical.

But to go in order, here's the first one: gold swaps, loans and deposits. While "reviewing the categories of financial assets and liabilities," Mink states the following, on the subject:

The accounting of repurchase agreements has been under discussion for some years. However, there is still insufficient agreement on how to improve the recording of repos. Nevertheless, some detailed changes have been included, for example that “on-selling is common” and that, in this case, a negative asset is recorded for the lender to avoid double-counting. Furthermore, repos should be covered in terms of a cash collateral as well as in terms of a security collateral, which also includes gold swaps, loans and deposits.

This is interesting: "...cash collateral as well as in terms of a security collateral," indicating the use of gold swaps, loans, deposits to prevent the "double-counting." Wow, that's almost sounds like it used to be! Imagine, actually being prohibited from lending the same "asset" to two different entities at the same time! The GATA/Fed gold swap issue suddenly takes on yet more significance. The August 7 2009 "
Central Bank Statement on Gold" from the latest CB/IMF discussions over the sale of the gold states that "Gold remains an important element of monetary reserves," and of course much of that importance is with gold swaps. Even more important would be the gold loans, which often quickly spirals into that wild world of gold leasing. But the mention of gold as a "security collateral" is worth noting.

And Mink's next mention of gold is yet more interesting. It comes on pg 78, table 8. This table lists "financial assets/liabilities," declares what "issues" each might have in regards to the reporting standards, and finally specifies the "embedding" that compromises/jeopardizes each: is the asset/liability subject to "money," to "household/corporate debt," to "government debt," to "credit"?

Of the two dozen or so listed "assets/liabilities," there are only two listed as having zero "embeddings:" SDR's and gold. This is interesting. Now, at first glance I thought that this was not accurate, since the IMF Special Drawing Rights should be embedded to government debt/IMF members’ balance sheets, right? Nope--because then I remembered something from my past research: the SDR's are backed by something as good as gold--the BIS.

As you may remember, the official currency unit of the
Bank for International Settlements itself is the SDR. The BIS, of course, and its member central banks and private individuals/corporations (until they were bought out in 2001) is the father of the IMF, so I guess I should technically stop called the SDR what I usually call it, which is "that little bastard fiat punk!" In seriousness though, the BIS also holds "Investment Accounts" or IA's for the IMF since 2005. These are international loans and investments that the IMF pays the BIS to run. The SDR itself took the position as official unit of the BIS from no other than the gold* Swiss franc in 2003 (*more on that shortly). As we know, the SDR's are "a potential claim on the freely usable currencies of IMF members"--55 of which are subject to the central banks that own the BIS.

Also as you know, the IMF just boosted the SDR base on Sept 9--yeah, boosted it by almost ten times!
Straight from the IMF, the allotted/available SDR base went from 21.4 Billion to 204 Billion. Check out this table from the IMF. The leftmost column is what Fund members had before, including many with "0." The rightmost column is the current post-Sept 9 allocation. The US went from 4.9 Billion to 35.3 Billion, and there are now zero countries without SDR's (of the 186 member countries).

What's more interesting than that IMF SDR allocation table, though, is the BIS' own balance sheet. The BIS already in August--before the 10x allocation--held SDR 252.9 Billion in deposits/assets, with SDR 238.3 Billion in liabilities/accounts payable. Here's the August 2009
BIS Balance Sheet. Let me run that by you again: the IMF "increased" the SDR supply from 21.4 Billion to 204 Billion in September, but in August, the BIS had SDR 253 Billion on its balance sheet. How the hell does that work?!

This is how it works: the BIS is creating up SDR's. The BIS is taking national currency deposits from the 55 member/owner central banks and converting them to SDR's on its own balance sheet. The SDR's are "claims on the freely usable currencies of IMF members," therefore, the deposits of the central banks become claims on those currencies--the deposits of the fiat central banks who can deposit as much as they feel at the BIS in whatever currency the chose--including the SDR's allotted to their "nation," as the central banks are the sole depositories for the national wealth/sellers of the national debt. The BIS is then paying out dividends to these same member CB's in the form of SDR's, which again can be used to claim currencies. By August 2009, they had just made up out of thin air almost twelve times the supposed global supply of SDR’s. They are truly acting like the "central bank of the world," complete with printing!

This would not be possible for any other currency: what happened in Zimbabwe when Mugabe created up trillions of Zimbabwe dollars to buy up foreign currency to pay off the IMF loans? It destroyed the Zimbabwe dollar, because he had to keep printing and printing, because the value of the Z$ went lower and lower, and no one would sell him their valuable foreign currencies for worthless Z$. Yet, the BIS had a "claim" on its balance sheet in August to an amount of over ten times the total available SDR's that the IMF had allocated to date. Why can the BIS pull this nonsense off--claiming more of a currency than exists of it--but Mugabe can't? Is this not like the idea that $1.5 Quadrillion "dollars" of derivatives "exists" when there aren't even $1.5 quadrillion dollars on the planet? Well, yes (actual, factual, logical), and no (bankster rules!): the important part, according to the BIS is that "no" part, and here's their perfect exemption, straight from the
IMF's explanation of SDR's:

"Various Fund members and one prescribed SDR holder have agreed to stand ready to buy and sell SDR’s on a voluntary basis."

Guess who's the one prescribed SDR holder? You got it--the BIS. Oh, thank goodness they are "standing ready" to help/oppress us all. Since the official unit of the BIS is the SDR, the BIS has the inside lane, because they are the "one prescribed" buyer/seller through which SDR's can be procured when no Fund member nation wants to sell--because they can create it! What other reason would the BIS move to SDR's? Besides that huge one, I'm sure there are many others, but I can also say that about a year and half before they ousted the "gold" Swiss franc in 2003, the Swiss government divorced the currency from its marginal (40%) gold backing, and by 2005 the CHF was totally fiat. The SDR, on the other hand, is the official currency unit of the single largest supranational holder of gold on the planet, and the third largest holder of gold period -- the IMF (which holds 3,217 metric tonnes of
gold; I say "suprantional" because other nations have more, but no other bank/institution has gold anywhere near the IMF's holding, which is not subject to repatriation to the Fund members who contributed it in the first place). Talk about hedging. While the IMF states that holders of SDR's have no entitlement to the gold held by the Fund, they aren't fooling me: the BIS owns the Fund. Add to that the fact that holders of SDR's receive weekly interest payments from the IMF, and there's two good reasons. What's a "central bank for central banks" to do?

I found this
currency converter that changes SDR's to gold in oz. Today, Oct 18 2009, SDR 1 buys .002 oz gold, or to flip it, 1 oz gold buys SDR 658.51. According to the IMF, when introduced to support the Bretton Woods system in 1969, "the value of the SDR was initially defined as equivalent to 0.888671 grams of fine gold—which, at the time, was also equivalent to one U.S. dollar." Now, that 0.888671 grams (converts to gold in ounces as 0.0285 oz, there's 31.1 gm/oz) buys SDR 18.77. Or, that same 1969 SDR/USD "$1" worth of gold, 0.888671 grams, costs exactly US$30 (pricing gold at $1050). The IMF still prices the 3,217 tonnes (103.4 million oz) of gold on their books as $42.22/oz for accounting purposes, but then converts the actual profits from auctions (400 tonnes of which are forthcoming/happened recently) to SDR's. The IMF accepts some currencies as payment for the quotas due from the Fund members, and that is held on their balance sheet as SDR's, because the IMF only loans out in SDR's. This, as you know, is why its so impossible for so many countries to repay the IMF loans in SDR's, because they have to purchases them back, and pledge their natural resources/labor/national sovereignty as collateral, which are more than happily scooped up by the wealthy Fund members (like EU members, the US, the UK), who never take the SDR loans in the first place, when the countries default. While the SDR holders are earning interest on their SDR's, those under loans are paying interest on the loan and incurring negative charges if they fall under their required quota for holdings of SDR's--of which they have zero, because they have to pay the IMF in SDR's! Totally criminal. Pure fraud.

The Federal Reserve reports SDR's on the balance sheet (as well as "monetary gold"). But something about the US' agreement concerning SDR's can be learned from the following explanation by the
Federal Reserve Bank of Chicago, in an endnote on their balance sheet states:

"SDR certificates are issued by the International Monetary Fund (the "Fund") to its members in proportion to each member's quota in the Fund at the time of issuance. SDR certificates serve as a supplement to international monetary reserves and may be transferred from one national monetary authority to another. Under the law providing for U.S. participation in the SDR system, the Secretary of the U.S. Treasury is authorized to issue SDR certificates somewhat like gold certificates to the Reserve Banks. When SDR certificates are issued to the Reserve Banks, equivalent amounts in dollars are credited to the account established for the U.S. Treasury, and the Reserve Banks' SDR certificate accounts are increased. The Reserve Banks are required to purchase SDR certificates, at the direction of the U.S. Treasury, for the purpose of financing SDR acquisitions or for financing exchange stabilization operations. At the time SDR transactions occur, the Board of Governors allocates SDR certificate transactions among the Reserve Banks based upon each Reserve Bank's Federal Reserve notes outstanding at the end of the preceding year. There were no SDR transactions in 2008 or 2007."

I can't wait to see if there are some SDR transactions to report in 2009. That the Treasury is authorized to issue SDR's is nothing special, as the FRS is the central bank of the US, and therefore is rather quite "entitled" to them, along with the interest payments. This same balance sheet from the FRB Chicago indicates that that bank held $913 million in US gold certificates, which are still pegged at $42.22 an ounce. (Isn't it great to think that the FRS can still get gold certificates from the Treasury, but we can't?) Here's the rest on gold from that same balance sheet:

"Payment for the gold certificates by the Reserve Banks is made by crediting equivalent amounts in dollars into the account established for the U.S. Treasury. The gold certificates held by the Reserve Banks are required to be backed by the gold of the U.S. Treasury. The U.S. Treasury may reacquire the gold certificates at any time and the Reserve Banks must deliver them to the U.S. Treasury. At such time, the U.S. Treasury's account is charged, and the Reserve Banks' gold certificate accounts are reduced. The value of gold for purposes of backing the gold certificates is set by law at $42 2/9 a fine troy ounce. The Board of Governors allocates the gold certificates among the Reserve Banks once a year based on the average Federal Reserve notes outstanding in each Reserve Bank."

From this FRS "
Factors Affecting Reserve Balances" (March 19 2009), if you'll see the FRS 12 banks together claim $11,037 million in gold certificates, with the FRBNY holding the most at $3,935 million. At $42.22 an once, with $11.037 Billion in outstanding gold certificates that "are required to be backed by the gold of the US Treasury," then the US Treasury needs 261,416,390 ounces, or 8130.95 tonnes (converter). So, the Treasury should have it, right? Weeell.....

They don't. The last "audit" of the deep-storage gold (and silver) holdings of the US Treasury was done in Sept 2007. I say "audit" because the count was made by "test" method, meaning not every ounce of metal was actually counted. Here's
the report: you can see yourself that the holdings are 245,262,897 oz, with a statutory value ($42.22/oz) of $10,355,539,091. Whoops. That's not the $11,037,000,000 that the FRS states on the Reserve Balances sheet, is it? (I double-checked, and the March 2007 FRS sheet also lists that $11.037 billion in gold certificates amount). Hmm.

But getting back to the BIS document, "Integration of new financial developments into the new worldwide statistical standards," there is one last mention of gold worth noting. It is again in a table of assets/liabilities, and it is table 8, pg 78. This table lists various investment instruments on one side and their status under the new IFRS on the other. Again at the very top are listed Gold and SDR's. The only item on the whole list labeled as an "unembedded" "tangible asset" is gold. SDR's are (rightly) listed as "debt instruments." The rest of the table is more debt instruments, equity instruments, loans and receivables, warrants, stock options--but no other unencumbered, tangible assets. (And by the way, "tangible" in CB circles doesn't mean "I can touch it," although with gold, that is of course true as well.) Like many have said, gold is one asset that is not someone else's liability.

I think there is a lot going on here. There are some serious moves being made with the SDR thing, and how gold plays into that is unknown to me. I'll complete this little report with an important explanation as to why Mink was even writing about the asset allocations in the first place. The BIS document was released on the site in June 2009, but it was completed in 2008. Mink is discussing in his essay on the new IFRS/NSA standards, with their new subcategories for reporting...

Those new, never before seen categories for asset/liability reporting are: monetary gold and SDR's (pg 469).

Well, I'll be.

FRBNY responds to gold inquiry

(originally composed October 21, 2009.)

This is an quick update to "
Monetary Gold, SDR's and the BIS."

After sending out the email on SDR's and "unembedded" gold, I received some questions from people that I thought were very good--so I decided to investigate a little more. One person asked me about the gold certificates that the FRS banks have on their balance sheets, which I mentioned in the email. He asked a great question about the gold certificate issue. Here's the part from the
FRB of Chicago's balance sheet that sparked the question:

"Payment for the gold certificates by the Reserve Banks is made by crediting equivalent amounts in dollars into the account established for the U.S. Treasury. The gold certificates held by the Reserve Banks are required to be backed by the gold of the U.S. Treasury. The U.S. Treasury may reacquire the gold certificates at any time and the Reserve Banks must deliver them to the U.S. Treasury. At such time, the U.S. Treasury's account is charged, and the Reserve Banks' gold certificate accounts are reduced. The value of gold for purposes of backing the gold certificates is set by law at $42 2/9 a fine troy ounce. The Board of Governors allocates the gold certificates among the Reserve Banks once a year based on the average Federal Reserve notes outstanding in each Reserve Bank. "

And here's the question: if the gold certificates are valued at $42.22/oz, and they are "bought" by the FR banks through a credit to the account of the US Treasury with the specific banks, and the Treasury is "required" to back them by gold, but the Treasury can "reaquire" the gold certificates at any time through a debit to its account at the FRS bank(s), then why does the Fed claim the gold certificates as collateral on their balance sheets against their loans not given to the Treasury?

Hmm. I didn't think of this at first, but it is true, because the gold certificates are listed as "assets" by the Fed on their balance sheets, and therefore used as "collateral" for their various lending (as if we believe they actually collateralize, but that's the technical use).

The source of the gold to which the certificates are supposedly linked is important. We know that there is a significant discrepancy between the 2007 audit and the $11,037 million in gold certificates claimed on the FRS balance sheets. To recap this issue, here's a part from my original post, "Monetary Gold, SDR's and the BIS":

From this FRS "Factors Affecting Reserve Balances" (March 19 2009), you'll see that the FRS 12 banks together claim $11,037 million in gold certificates, with the FRBNY holding the most at $3,935 million. At $42.22 an once, with $11.037 Billion in outstanding gold certificates that "are required to be backed by the gold of the US Treasury," then the US Treasury needs 261,416,390 ounces, or 8130.95 tonnes (converter). So, the Treasury should have it, right? Weeell.....They don't. The last "audit" of the deep-storage gold (and silver) holdings of the US Treasury was done in Sept 2007. I say "audit" because the count was made by "test" method, meaning not every ounce of metal was actually counted. Here's the report: you can see yourself that the holdings are 245,262,897 oz, with a statutory value ($42.22/oz) of $10,355,539,091. Whoops. That's not the $11,037,000,000 that the FRS states on the Reserve Balances sheet, is it? (I double-checked, and the March 2007 FRS sheet also lists that $11.037 billion in gold certificates amount). Hmm.

Therefore, we know that according to both the Federal Reserve's own balance sheet and the audit that there is 261,416,390 (face of certificates) - 254,262,897 (actual audit results)= 16,153,493 ounce difference--or about 458 tonnes missing. Something funny is going on here.

So returning to the collateralization of this "gold" through the certificates, the real question is: For which party is the gold an asset, and for which is it a liability? Collateral implies the ability to seize if the asset owner (the creditor) has an issue with the liability owner (the debtor). The fact that they are "certificates" would suggest that the party who holds the certificates would be the asset owner, while the party with the gold would be subject to the certificates being called. But--bizarrely-- it is not this way at all: according to the FRS and Treasury, the FR banks (who would classically be considered the creditor) must return the gold certificates whenever the Treasury (who would be considered the debtor) requests in return for a dollar payment based on the $42.22/oz gold peg. That is not collateral: that is saying that if the Treasury calls the "collateral" the Federal Reserve will stick them with a $11,037 billion bill. Granted, the street value of the gold would be 25 times the $42.22--but that's really not the point--especially if the gold is not there in the first place! Meanwhile, how can these same gold certificates possibly be collateral if the FR banks are also claiming these same gold certificates as assets to back other loans (meaning yet another layer of collateralization), and what is the value the FR banks are giving the gold certificates in those cases? Is the FRS pledged them at $42.22/oz, or some other value?

Of course, even more frustrating is that the FRS never even owned the gold in the first place. The gold was the property of the people, because it was the backing of the currency. Every paper note holder owned a piece of that gold, not the FRS--they sold the gold for paper. Let's quickly review the gold confiscation timeline: just weeks into the office of the President, F D Roosevelt signed
Executive Order #6102 in April 1933, which demanded the surrender of all privately held gold coin, bullion, and certificates: gold was siezed from citizens, monetary gold coins ($5, $10, $20) were removed from circulation, and private gold deposits were emptied and replaced with stacks of Federal Reserve notes of "corresponding" value based on the $20.67/oz peg. The Treasury was not siezing the gold: the Federal Reserve banks were doing the siezing, as these FR banks were giving out the paper FR notes in exchange. Therefore, the Federal Reserve banks soon came into possession of the majority of circulating gold coins and also bullion gold deposits, and with the FRS's agreement to the Gold Reserve Act of 1934, private ownership of monetary gold was outright illegalized, and the FR banks agreed to give all the gold (which they had siezed from the people) and any "title" to gold over to the Treasury. In exchange, the FRS was no longer required to back the dollar with gold domestically, and futhermore, placed the Treasury on the hook for the settlement of international gold-dollar exchanges, which were still legally binding. Of course, this was after the gold had been magically revalued with the stroke of Roosevelt's pen by a whooping 75%, from $20/oz to $35/oz. The revaluation allowed the FRS to create up that money--and now being completely free of the gold shackles, the FRS had nothing to do up create up money, while the Treasury had the gold which it was required to give to foreign central and commericial banks on demand who wanted to exchange paper dollars for metal. I have not yet found any accurate record of how much gold left the Treasury's reserves to settle the Federal Reserve's debt (notes).

So back to the collateral question: Considering that the gold itself which was "seized" from the Federal Reserve is the "property" of the US Treasury (including the gold confiscated from US citizens by the Federal Reserve banks in 1933 in cooperation with the Treasury) then how can the FRS banks possibly claim the gold certificates as "assets," nevermind attribute to them a their legal value of $42.22/oz if they are the "required" collateral for their advances against Treasury? Knowing no where else to turn than the masters themselves, I decided to call the ever helpful people at the Federal Reserve Bank of New York! (Yeah, you can call them--ask for Chester, he's the public relations' guy I usually talk to). I asked them the above question. The lady acknowledged the gold certificates as part of the FRBNY's (and the other 11 banks') balance sheet, but assured me that the FRBNY itself holds no gold, but is only a "guardian" for some of the gold of the US Treasury, as well as gold from many international commercial banks and central banks. I asked about the collateral thing, and she referred me to the Treasury's website.

So over to the Treasury's own website, I go. Well, proving yet again that the FRS runs the show, here is "the information" she promised that I would indeed find, from the
US Treasury itself:

"Congress has specified that a Federal Reserve Bank must hold collateral equal in value to the Federal Reserve notes that the Bank receives. This collateral is chiefly gold certificates and United States securities. This provides backing for the note issue. The idea was that if the Congress dissolved the Federal Reserve System, the United States would take over the notes (liabilities). This would meet the requirements of Section 411, but the government would also take over the assets, which would be of equal value. Federal Reserve notes represent a first lien on all the assets of the Federal Reserve Banks, and on the collateral specifically held against them. Federal Reserve notes are not redeemable in gold, silver or any other commodity, and receive no backing by anything. This has been the case since 1933. The notes have no value for themselves, but for what they will buy. In another sense, because they are legal tender, Federal Reserve notes are "backed" by all the goods and services in the economy."

From the US Treasury itself, we are reminded that "The (Federal Reserve) notes have no value for themselves, but for what they will buy." So much for "collateral"--the collateral is only to the Federal System, not to the Treasury. Read that first line again: The specific Federal Reserve bank must hold collateral equal in value to the the Federal Reserve notes that it receives/requests/buys the the Federal Reserve System. Now--remember from the other section above, the Board of the FRS is the one who allocates the gold certificates. Yet, the gold certificates must be backed by gold at the US Treasury--how the hell did the Treasury get sucked into that? The district banks get certificates collateralized by the US Treasury's "gold" that they then can use as collateral for the FR notes they request/buy from the FRSystem, but it is the Board that gives them the certificates, NOT the Treasury?

There will be more research into this. This makes Maiden Lane I, II, and III look simple.