Wednesday, October 21, 2009

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.

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