I sent this report to REMNANT REVIEW subscribers in February, 2002.  I want to share it with you, even though the gold market has long since confirmed what I wrote then.  I want you to understand why I believed that gold had bottomed in 2001, and what the forces are that will push gold's price higher.  I still believe it.

     Pay close attention to my discussion of James Turk's reports.  Turk believes that the U.S. government has quietly leased out all of its gold.  If he is correct, then the government cannot get it back.  Gold's borrowers have paid about 1% per year to borrow the gold.  Then they sold it, pushing gold's price down.  Then they took the money and invested it at market rates -- over 7% when the leasing process accelerated sometime around 1997.  It was a sweet deal until gold's price started upward.  Now it threatens to bankrupt the so-called gold-bullion banks.

     If Turk is correct, the banks that are in debt in gold bullion cannot buy it back to repay their debts.  If they try, gold's price will soar.

     I warn you, this informationis arcane material.  The average Congressman knows nothing about it, let alone the average voter.  But gold investors should be aware of these issues.

     I begin with an article written by two economists, one of whom worked at the time for the Federal Reserve System.  It was published in 1997.  You can read it here:

      http://www.econ.lsa.umich.edu/~ssalant/hhh.pdf

     The authors wrote that if every central bank sold all of its gold in one gigantic auction, the price of gold would decline by about 11%.  The price in 1997 was $350.  A gigantic, one-shot auction by central banks would drop the price to "about $309" (p. 3).  (Only academic economists would be as specific as $309.) 

     Here is part of what I wrote in 2002. . . .

                       * * * * * * *

     What if the United States were to sell all of its gold in one shot?  What price effect would this have?  Gold would fall by $10 an ounce, the report says.

     Up to this point, we have considered actions that might be taken by all governments acting together.  Of course, one government may sell even if others do not. As shown in Chart 6, if the United States sells all its gold but other governments do not, the price is estimated to drop only to about $340 [down from $350 -- G.N.]. U.S. receipts are about $89 billion, about 10 percent higher than if all governments sold.  A credible announcement by other governments that they intend to sell gold soon has almost the same effect as an immediate sale (p. 5).

     Now, I'm not sure they were correct in 1997.  No one can be sure.  I think such a sale would have dropped the price by more than $10.  But this is what the document says.

     The report's paragraph ends: "Thus, the U.S. example illustrates the consideration that each government makes more revenue if it sells before other governments either sell or announce a sale."  This insight surely isn't going to win its authors a Nobel Prize.  Of course it's better to sell before others do.  But this assumes that central bankers will take the authors' advice and sell all of their gold at one time, which is what the authors recommend.  The paper calls for coordinated selling.  But they offer a fall-back position: leasing.  I will return to this theme later in this report.

     In the paper, there is a chart of the distribution of gold, government vs. private.  The chart counts the estimated gold in mines, which seems strange.  Gold in the ground affects today's price only indirectly, insofar as it suggests possible increases in supply over the years.  If you wanted delivery of gold today, gold in the ground would do you no good.

     A lot of gold is flowing into Asia.  India's fathers endow their daughters with gold jewelry before a marriage.  This is the property that they bring into the marriage.  This is an old tradition.  It will not change soon.  Meanwhile, Indians are getting steadily richer.  They can buy more gold.  Dowry gold rarely comes back onto the market except during economic crises, such as famines.  India is steadily becoming a free market society, and famines are rare in free market societies.  Japanese investors have begun to buy.  There are indications that the central bank of China is buying more gold than previously estimated.

     This means that if there were a rising price of gold because of fears about inflation or, far more interesting, realization that the central banks have quietly leased out most of their gold and cannot sell any more to keep down its price, then Indian wives are unlikely candidates to supply gold in a panic move upward.  At some price, yes, but would be a very high price.
 

GOLD LEASING

     There is a very interesting section on gold leasing.  The authors regard leasing is a viable alternative to actual gold sales.  I believe that their advice here has been taken.  I think it began over a year before the essay was published.  There has been no formal announcement of this change in policy.  There are other indications that central bankers have used gold leasing as a way to keep the price of gold declining.  The authors argue:

     Governments can achieve a welfare gain roughly equal to that from an immediate sale through alternative policies.  One such policy is specified in the bottom panel of Chart 5.  Under this alternative policy, governments loan out all their remaining gold in each period.  In the future when all gold now owned by private agents, whether above or below ground, has been used up, governments sell in every period whatever gold is necessary to make the price be what it would have been if they had sold all their gold immediately. The quantities of gold available for private uses are the same under the alternative policy as with an immediate sale.  However, there is an important difference: under the alternative policy, governments relinquish title to their gold in the future and then only gradually. Therefore, to the extent that government uses can be satisfied by owning gold but not physically possessing it, most if not all of the gains associated with maximizing welfare from private uses can be obtained with little or no reduction in welfare from government uses until sometime in the future (p. 5).

     Here we have the key that may unlock the question, "Why did gold fall from $350 to $280 in 1997?"  Analysts have looked for the answer in central bank sales.  Only Great Britain and Switzerland have been selling much gold.  Great Britain next month will conclude three years of auctions of 365 tonnes, half of its gold reserves.  In September, 1999, there was a 5-year agreement by central banks that they will not sell more than 400 tonnes a year, combined.  The IMF agreed to this.  But this agreement did not include leasing. 

     In a follow-up paper, the authors explained their recommendation.

          Governments can make gold available for private uses through a class of policies involving equivalent combinations of gold sales and gold loans.  A gold loan involves receiving gold today and returning the same amount of gold and a loan fee at some future date.  For simplicity, we focus most of our attention on the case of a sale of all government gold.  A policy that is equivalent to a sale of all government gold in a given period is a commitment in that period to lend out at the beginning of every future period all remaining government gold and to sell at the end of every period after some date in the future whatever amount is required to satisfy the demands of depletion users at the price that would have prevailed in that period if all government gold had been sold in the given period.  If government uses of gold require ownership but not storage, any loss in welfare from government uses resulting from making government gold available for private uses would be much smaller under the policy involving lending and gradual sales in the future.  ("Can Government Gold Be Put to Better Use?" p. 2. Board of Governors, Federal Reserve System, June, 1997.  International Finance Discussion Papers  #582.  The italics are in the original document.)

  http://www.federalreserve.gov/pubs/ifdp/1997/582/ifdp582.pdf

     Why would a government want ownership, but not storage?  They did not explain.  They did not have to.  By retaining legal ownership, governments and central banks are not required to report the physical depletion of their gold reserves.  Elected politicians are unaware of the physical transfer of their nations' gold into the private sector -- such as India -- and would-be speculators who are ready to buy gold as an inflation hedge remain fearful that the central banks will sell all of that gold, forcing down gold's price.
 

TURK'S REPORTS

     In a pair of newsletter reports last year [2001], James turk has followed certain shifts in definition by the U.S. Treasury and the Federal Reserve System regarding U.S. gold reserves.  The old term used to be "gold stock."  The portion of the gold stock at West Point was re-named "custodial gold" in September, 2000.  In June, 2001, this gold was re-named again: "deep storage gold."  Turk presents a detailed report on the decline of SDR [Special Drawing Rights] Certificates in the Exchange Stabilization Fund, a fund used by the United States to stabilize the exchange value of the dollar.  The decline was from 9.2 billion (Dec. 1998) to 2.2 billion (Dec. 2000).  (Freemarket Gold & Money Report, July 23 and August 13 issues. www.fgmr.com.)  The SDR is defined in terms of gold: 35 SDR's = one ounce of gold.  So, 9.2 billion = 262.9 million ounces.  There are now 2.2 billion SDR Certificates remaining in the ESF, or 62.9 million ounces.  The difference is 200 million ounces. 

     A summary is available on-line, posted by the Gold Anti-Trust Action Committee.  It shows the decline in the SDR Certificates. I offer extracts from the full report, which you should read in its entirely.

     "Everything is fitting into place," [GATA's Bill] Murphy says. "It appears that the SDR certificates are being used by the ESF to hide its gold transactions from the American public."

     GATA has long claimed that central bank gold loans are two to three times the commonly accepted 5,000 tonnes cited by the gold industry. "Eighty-seven percent of the U.S. gold reserves is very close to 7,000 tonnes, which would increase to 12,000 tonnes the official sector gold out on loan in some way," Murphy notes.

     "No wonder former Treasury Secretaries Robert Rubin and Lawrence Summers and current Secretary Paul O'Neill have refused to directly answer members of Congress regarding their gold market queries," Murphy goes on. "The ESF reports only to the president of the United States and the treasury secretary, which means that these men are very aware of the mechanics of manipulating the gold price." . . . .

     Then in an August 7, 2001, letter, John P Mitchell, deputy director of the U.S. Mint, offers no explanation why 1,700 tonnes of U.S. Gold Reserves stored at West Point, N.Y., were reclassified in September 2000 from "Gold Bullion Reserve" to "Custodial Gold." In May this year all 7,700 tonnes of the U.S. gold reserves in Treasury Department depositories were reclassified as "Deep Storage Gold."

     Mitchell says the U.S. Gold Reserve was "not reclassified -- it was renamed to better conform to our audited financial statements."

     "But Mitchell offers no explanation why that change is being made now. Could it be that these changes to conform to accounting principles were necessary because of the dramatic reduction in SDR Certificates and encumbering of the U.S. Gold Reserve?" Murphy asked.

     "This is most frightening," Murphy says. The U.S. Government defaulted on its gold obligations in 1933 and 1971. Could it be happening all over again?

     I asked Turk a series of questions by e-mail.  His replies are quite revealing.  My questions related to the means by which the leasing operations have taken place.
 

     North:  That the U.S. may be making available gold to the Bundesbank is conceivable, but to what purpose? 

     Turk: The ESF needs gold in Europe for lending to bullion banks.  There is no bullion lending in the States.  So the ESF lends the Bundesbank gold which is stored in Frankfurt, Zurich, London etc. In return, the Bundesbank gets the US gold in West Point.

     North: Is the bulk of gold leasing conducted through the Bundesbank? 

     Turk: The ESF lends the gold to JP Morgan Chase, Citibank and Deutschebank of course.

     North: The price of gold can only be forced down by the sale or lease of gold, or the threat of a sale.  There has to be an outlet into the private market.  Is there any monitoring of such purchases?

     Turk: Yes, Frank Veneroso is one of the leading gold analysts with great central bank connections.  He believes that upwards toward 15,000 tonnes has been loaned by central banks, much more than the estimates by Gold Fields Mineral Services.  The reason is that GFMS, as I understand it from Veneroso, largely ignores the borrowing by commercial banks to fund their own portfolios, i.e., the so-called carry-trade. GFMS only looks at hedging.

     My guess is that it is being leased, so that there is no evidence of reduced central bank inventories.  Still, someone has to be selling gold into the market if downward price pressure is to be maintained.  Why wouldn't this huge increase in purchases be visible to the public?

     According to Veneroso's statistics, it is.  Last year demand was 1500 tonnes greater than supply.

     North: If the IMF is doing it, then what role does the Bundesbank play?

     Turk: Pawn, for the US banking interests, which they manipulate through the IMF.

THE IMF

     GATA has now revealed evidence that the IMF is doing exactly what that 1997 Fed report recommended.  The IMF has unofficially changed the rules.  It now allows central banks to keep leased-out gold on their books as actual reserves. 

     In October 1999 the IMF held a meeting for its member countries in Santiago, Chile, only a couple of weeks after a lightening $84 run-up in the price of gold. GATA's Mike Bolser found the IMF manual distributed to the attendees, which explains how member central banks are to account for something called gold swaps -- gold that leaves the vaults of the central banks. In effect, Bolser came across the IMF's gold "play book."

 As you will learn shortly, it appears the gold swap issue is at the heart of the manipulation of the gold price. 

 Bolser's discovery led GATA's Andrew Hepburn to query the IMF with the following:

 Why does the IMF insist that members record swapped gold as an asset when a legal change in ownership has occurred?

 The IMF answered:

     "This is not correct: the IMF in fact  recommends that swapped gold be excluded from reserve assets. (see Data Template on International Reserves and Foreign Currency Liquidity, Operational Guidelines, para. 72," 

     Over the years the GATA camp has received nothing but denials from the U.S. Treasury, Alan Greenspan, BIS, bullion banks and the IMF. In essence, their responses have been well-couched, disingenuous and difficult to disprove. THIS response was NOT because of the sleuthing of Canada's Hepburn. Their constant lying finally caught up with them. The central bank of the Philippines responded to Hepburn as follows:

    "Beginning January 2000, in compliance with the requirements of the IMF's reserves and foreign currency liquidity template under the Special Data Dissemination Standard (SDDS), gold swaps undertaken by the BSP with non-central banks shall be treated as collateralized loan. Thus, gold under the swap arrangement remains to be part of reserves and a liability is deemed incurred corresponding to the proceeds of the swap." 

     The GATA camp caught the IMF flagrantly deceiving the public. Since then, the IMF has refused to answer all follow-up questions from GATA supporters. 

            http://www.gata.org/neworleans.html

     Central banks seem to have been secretly dumping gold into the market in order to depress its price.  All of this is guesswork based on obscure statistics and a change in the IMF's reporting rules.  But it would explain the failure of gold to hold above $300.  I think GATA's analysis makes sense. 

     If this analysis is true, then we are seeing the greatest irony in the history of fractional reserve banking.  Always before, the banks had taken in gold from the public, issuing IOU's to gold in exchange.  Then the banks have loaned out IOU's to gold that they did not have in reserve.  They drew interest on the loaned IOU's to gold.  Then the banks defaulted, keeping the public's gold, refusing to redeem gold on demand.  The governments of the world accepted this lawless transfer of gold officially to them, the governments. 
 

OUT THE BACK DOOR

     Today, we know that central banks have lent some of their nations' gold bullion to bullion banks for an interest payment of 1.3% per annum: the gold-lease rate. That was in 2002. These days, the rate is under .3% per year. This is posted on

             http://www.thebulliondesk.com

Look to the right of "Top Reports." You will see buttons: "PGMs," "Charts (near)," etc. The eighth button is "Leases." Click it. 

     The bullion banks sell the borrowed gold into the private markets, receive money for it, and invest the money at the market rate of interest, which is way above .3%.  The bullion banks have told the central banks, "we'll repay, someday."  The question of questions now is this: Can they ever repay?  The gold is long gone.  It's in some Indian bride's dowry.

     The European central banks stole gold from the public in 1914 by revoking gold redeemability when World War I broke out.  Now these banks have lent this gold to bullion banks for 1% per annum.  Bullion banks have transferred ownership of this gold back to the public, paying 1% to the central banks for the privilege, plus a promise of repayment Real Soon Now.  So, the masters of fractional reserves, central bankers, have been conned by the public's economic agents: the bullion bankers, who got the central banks to turn over the gold.  The bullion banks have now issued IOU's to the central banks.  They are "borrowed short": and "lent long."  In short, the bullion banks have done to the central banks what the commercial banks and central banks did to the public in 1914.

     We the people have now got most of our gold back, and we don't even know it yet.

     The exception seems to by the Federal reserve.  It looks as though the FED has not leased its gold.  But Turk's figures indicate that the FED may have swapped its gold for the Bundesbank's gold, and then the Bundesbank sold off 86% of the FED's gold.  This means that the gold in storage at West Point -- "custodial gold" -- is exactly what the phrase indicates: we are keeping this gold for the Bundesbank.

     The privately owned bullion banks are short: they have promised to return the central banks' gold at some future date.  The major gold mines are also short: they have promised to repay gold out of production at some future date.  In a January 23, 2002, report by John Hathaway, "The Investment Case for Gold," the author observes:

     Forward selling or hedging by gold companies to"lock in" margins is the antecedent of business practices adopted by Enron and other entities that prefer counter party to market risk.  The architects of the gold industry's lamentable dalliance with derivatives will engineer grief well beyond the gold sector.  Financial market exposure to interest rate and foreign exchange derivatives dwarfs the notional value of gold and commodity contracts.  Gold derivative traders have laden the books of their host institutions with the financial equivalent of toxic waste dumps.  The intellectual basis for the existing gold derivative books, representing at least 5000 tonnes, or two year's mine production, was a bearish view of gold and a uniformly bullish view of the dollar.

     They may not recognize this for several years.  But, at some point -- I believe within the next three years -- the central banks will cease selling gold every time its price rises above $300.  [This turned out to be true -- so far (Canada excepted, which is almost out of gold) -- last year, when I was writing this report.]  Their actual physical reserves are too depleted.  If investors perceive that this is the central banks' new policy, gold will jump way above $300.  At that point, the bullion banks, which are short, will be caught in a monumental squeeze.  They will not be able to cover by buying gold futures, because the physical gold is not available for delivery.  This will leave them exposed to bankruptcy, and it will leave shorts on the futures market trapped.

     What would happen on the gold futures market when everyone knows that there is not enough gold for delivery?  Lock limit up.  Lock limit up.  Lock limit up.  The gold futures market will not be where the gold shorts will want to be.  Or anywhere else, for that matter.

     If China starts selling dollars and taking delivery of gold, then there will be a crisis in the gold futures markets on the scale of January, 1980.  This policy would be consistent with China's goal to become the dominant economic nation in Asia, replacing Japan.
 

CONCLUSION

     If price deflation really is coming, despite monetary inflation, gold could fall.  But I think today's monetary inflation will secure the U.S. economy against a price-deflationary scenario. 

     The other major negative factor, another series of unexpected gold sales by central banks, is increasingly unlikely.  They are running out of gold, despite the official statistics on their unchanging official reserves.  They can sell gold reserves again, but at some point, the game must end.  We are closer to the end than five years ago, when the gold-leasing strategy was adopted.