Saturday, September 25, 2010

Show Us the Gold!

Gary North reports that Ron Paul is going to introduce legislation in 2011 that would require an audit of the gold held by the Federal Reserve on behalf of the United States government.

Those not versed in the attitude of the United States government toward gold may shrug and say, "So what? Who cares?"

The answer is that everyone should care. The Federal Reserve and the United States government care. They don't want an audit. This in itself should raise suspicions.

Gold is important because unlike paper money, a government can't print gold at will. It is a safe haven for liquid wealth when a government gets out of control with the printing of its own money. During a hyper-inflation gold is a lubricant that can keep some semblance of exchange going. Governments hate this check on their power. No further proof of this is necessary than the actions of the United States government toward gold.

Executive Order 6102 was signed on April 5, 1933 by Franklin Roosevelt "forbidding the Hoarding of Gold Coin, Gold Bullion, and Gold Certificates" by U.S. citizens. That is it was made illegal for U.S. citizens to own gold.

Executive Order 6102 also required U.S. citizens to deliver on or before May 1, 1933 all but a small amount of gold coin, gold bullion, and gold certificates owned by them to the Federal Reserve, in exchange, per troy ounce, for $20.67 in Federal Reserve paper currency. Under the Trading With the Enemy Act of October 6, 1917, as amended on March 9, 1933, violation of the order was punishable by fine up to $10,000 ($167,700 if adjusted for inflation as of 2010) or up to ten years in prison, or both.

Tell me the government isn't spooked by gold, if they confiscate all the gold held by citizens and make it illegal to own gold. But the government's paranoia about gold didn't stop there.

The Gold Reserve Act of 1934 went further and made gold clauses in contracts unenforceable. The Act, itself, was introduced to correct technical deficiencies in FDR's original Executive Order.

The limitation on gold ownership in the U.S. was not repealed until President Gerald Ford signed a bill legalizing private ownership of gold coins, bars and certificates by an act of Congress, which went into effect December 31, 1974.

However, don't think Ford's repeal of the prohibition on owning gold ended the paranoia about gold at the Federal Reserve.

The Federal Reserve, in the 1970's, had a secret agreement with the German government whereby the German government agreed not to buy gold in the open market, or from other governments, at a price above the then-official U.S. government price of $42.22 per ounce, despite the fact that the open market price for gold was then trading between $160 to $175 per ounce.

This information about the secret agreement with Germany has come to light as a result of a recently declassified Memorandum sent by then-Federal Reserve Chairman Arthur Burns to President Gerald Ford. The document was originally classified as "Strictly Confidential".

I personally verified the authenticity of the document in a conversation with the Gerald R. Ford Library archivist Mark Fischer. Although the document appears to have a declassification date stamped on it of 6-28-05, Fischer tells me that the document was declassified just recently on 9-15-09.

The document is fascinating and shows the Federal Reserve's concern about gold gaining a role in global monetary transactions. The document is here.

Of course, for many, the 1970's are ancient history. Is there any indication that the government still harbors a paranoia surrounding gold? More recently, there have been rumors that the government was "leasing" its gold out, i.e. loaning out the gold. Thus, the Treasury or the Federal reserve can technically say it has not sold its gold, but by leasing it out, the party the gold is leased to can sell it in an attempt to keep the gold price down.

In late 2009, I asked Phillip Swagel, who was Assistant Secretary for Economic Policy under Henry Paulson at the Treasury Department from December 2006 to January 2009, about any gold leases or gold swaps that the Treasury or the Federal Reserve may have conducted. Swagel gave me the impression he did not know what a gold swap or gold lease could be, as though he had never heard the terms before. As far as I am concerned, it is a very big stretch for Swagel to not understand the terms. I chalked it up to more government obfuscation.

This year, the healthcare act, yes the healthcare act, mandates that beginning in 2012 that coin and bullion dealers will be required to report to the Internal Revenue Service all gold and silver coin purchases and sales greater than $600. Sure looks like there is a new eagerness to track gold coin holders.

In this context, it can be understood why the Federal Reserve doesn't want an audit of the gold it holds. The Federal Reserve paranoia about gold is as old as the Fed itself. The paranoia would be even more acute if the quantity held is less than what they say is there , or of a lesser quality. It would be a huge stake driven into the Fed's ongoing anti-gold propaganda and other anti-gold activities. As North writes:

On paper, Congress also has the right to make certain that the gold reserves of the United States government are still available to be used by the United States government, should the United States government ever decide to do something with the gold.

Any attempt by the Federal Reserve to argue that it must not allow the United States Congress to see if there is really any gold in its vaults is going to be a very difficult public relations exercise.

It is one thing for the FED to say that a full audit will interfere with the privacy necessary for the conduct of central bank operations. Some voters might actually believe this. But it is something completely different to say that the Federal Reserve should not be required to prove that it still has possession over the gold that it purchased with the money created by the FED in 1933 and 1934. Its reports have always said that it does. If it doesn't, then there will be a huge scandal. "Who got America's gold?" That would force Congress to conduct a full-scale audit.

The public really does believe that the gold belongs to the government. Legally, the gold does not belong to the government. The Federal Reserve bought it fair and square back in 1933 and 1934 with newly created money. The gold is on the books of the Federal Reserve System. But the public, which is na├»ve, has the illusion that the government did not turn over the gold to the bankers in exchange for bookkeeping entries created out of nothing by the Federal Reserve System. The public thinks that whatever is in the vault at Fort Knox is in the vault of the government entity. Voters do not know that deliverable gold – 99.9% pure – is stored in the vault of a private entity, the Federal Reserve Bank of New York. The gold in Fort Knox is probably coin melt: 90% pure.

So, the Federal Reserve is going to be facing a big problem in 2011. If the Democrats lose control of the House, and Dr. Paul introduces his legislation as announced, the FED will have to invent some kind of believable reason why the United States government does not have the right to find out if the gold that is supposedly owned by the United States government is really in the vaults of the Federal Reserve Bank of New York and the other vault in Fort Knox, Kentucky.

If it were to turn out most of the gold in Fort Knox and New York is not there, the price of gold will rise. The investing public will figure out that the price of gold has been kept low by means of secret government sales of their nations' gold reserves – what Gordon Brown a decade ago did publicly with half of Britain's gold. With a scandal brewing, there will be no more central bank "leasing" of gold. That will dry up the supply.

If it turns out that the gold in Fort Knox is melted coins, and not deliverable gold for international markets, international markets will respond accordingly. Gold will go up.
Got that? The results of an audit might result in the price of gold climbing higher. Sounds like fun. I say, pick up some gold now and get ready to demand, next year, that your congressman vote for an audit of the gold held by the Fed.

1 comment:

  1. ''The public really does believe that the gold belongs to the government. Legally, the gold does not belong to the government. The Federal Reserve bought it fair and square back in 1933 and 1934 with newly created money. The gold is on the books of the Federal Reserve System.''

    I may be wrong here, but didn't The Gold Reserve Act of 1934 required the Federal Reserve to SURRENDER all its Gold to the Department of the Treasury? Therefore, I understand that Fed does NOT own any gold.

    Please explain if I am mistaken here.