April 9, 2000. The ESF and Gold: Past as Prologue?

The recently released March 2000 Treasury Bulletin ( contains the Exchange Stabilization Fund's balance sheet and profit and loss statement for the quarter and fiscal year ending September 30, 1999. Prior quarterly statements, in mildly varying formats but similarly limited levels of detail, are available in earlier bulletins. These are summarized for five-year intervals from 1935 to 1995 in tables 1 and 2 contained in A. J. Schwartz, "From Obscurity to Notoriety: A Biography of the Exchange Stabilization Fund," Journal of Money, Credit, and Banking (Vol. 29, No. 2, May 1997), pp. 135-153. Although the ESF's current balance sheet shows total assets of about $41 billion, this number must be reduced by at least the $8.2 million of liabilities for SDR certificates to arrive at total resources available to the ESF. For more discussion of the intricacies of the ESF's balance sheet, including "monetizing" SDRs and "warehousing" foreign currencies with the Fed, see W. P. Osterberg et al., "The Exchange Stabilization Fund: How It Works," Federal Reserve Bank of Cleveland, Dec. 1999 (

Created by the Gold Reserve Act of 1934, the ESF began operations in April 1934, financed by $2 billion of the profits realized from the New Deal's gold confiscation and subsequent devaluation. However, only $200 million was made available to the ESF as working capital, of which $20 million was soon invested in gold, held mostly at the U.S. Assay Office, and $30 million in silver. The other $1.8 billion remained in the Treasury's gold account, and ultimately was used to fund part of the original U.S. subscription to the IMF. All SDRs allocated to or otherwise acquired by the U.S. are turned over to the ESF.

A review of the ESF's past quarterly statements, together with other quarterly international financial statistics contained in the same bulletins, reveals some interesting facts: (1) until April 1989, the Treasury's gold stock and the total U.S. gold stock, which also included gold held by the ESF, were reported separately in table IFS-1; (2) from 1974 to April 1989 these two numbers were the same, implying that the ESF held no gold during those years; (3) in 1973 and prior years, the ESF reported gold holdings of varying amounts. According to Schwartz (p. 148), this gold was held in a special ESF account at the New York Fed, and in 1974 was consolidated with the Treasury's other gold in anticipation of its 1975 and 1978-79 gold auctions. Schwartz also reports (p. 138, fn. 6) that at the 1977 IMF gold auctions, the Treasury purchased gold which it sold to the ESF, and that this gold appeared on its balance sheet for the first three quarters of 1977 but not thereafter. Why the ESF purchased this gold and what it did with it remains unclear.

Of more relevance for present purposes is the ESF's income statement, and particularly the first line: "Profit (+) or loss (-) on: Foreign Exchange." In the statement for December 31, 1977, this account read: "Profits on transactions in: Gold and exchange (including profits from handling charges on gold)." Similar language appeared in prior statements, so that until the end of 1977 profits or losses on gold and foreign exchange were lumped together in a single line item. In the statement for September 30, 1978, the language was similar, but there were separate line items for gold and foreign exchange. However, only the line for foreign exchange showed activity during the year. In the statement for December 31, 1978, the separate line item for gold was eliminated, and the current format of a single line item for foreign exchange with no specific reference to gold was adopted. Accordingly, if the ESF has resumed trading in gold or gold derivatives, historical practice indicates that the profits or losses on these activities should be reflected in this line item absent creation of new line item for gold.

The following table shows the ESF's profits or losses (-) on foreign exchange by quarter and fiscal year from fiscal 1981, the first year of the Reagan administration, through fiscal 1999, the most recent data. All amounts are in US$ millions.

   Fiscal        Oct./    Jan./    Apr./    Jul./    Total
     Year            Dec.     Mar.     Jun.     Sep.     FY

    1999            1699     -817     -500*    1257     1637
    1998            -754     -333     -135      576     -646
    1997 (Korea/    -383    -1093      402     -538    -1613
    1996            -449     -547     -419     -214    -1629
    1995 (Mexico)    -38     2623      276    -2054      808
    1994           -1116     1388      883      102     1257
    1993           -1700      965      412      437      114

    1992            1264    -1267     1495     1191     2683
    1991            1020    -1357     -421      739      -19 
    1990             327     -722      944     1752     2301 
    1989             545     -555     -501      471      -39

    1988             994     -236     -414     -133      212 
    1987 (Louvre)     96      589      -51      -15      618
    1986             456      488      478      504     1926
    1985 (Plaza)     -57       50       43      441      477 

    1984             -26      107     -165     -162     -246 
    1983             524      -64       41      112      613
    1982             439     -475      -95       99      -32
    1981            -217     -390     -806      241    -1172

    * Income of $36 million for "Commissions" reported as separate
      line item this quarter; no similar entry before or since.

Because the ESF is self-funding, its earnings on gold and foreign exchange trading (as well as its interest income on investments held) are accumulated in the fund, and it has incentive to operate profitably. As these reports make clear, the ESF does not confine its foreign exchange trading to interventions for purposes of currency stabilization. Indeed, the Treasury has reported to Congress that the ESF did not conduct any "interventions" in 1998 or 1999, yet its activities nevertheless generated foreign exchange profits or losses, as they did in prior years when interventions for the purpose of currency stabilization were few or none. However, since the ESF is sometimes used as a vehicle for providing aid to other countries, e.g., Mexico in 1995-1996, Korea possibly in 1997, some losses in certain years may be attributable to these activities, which really are undertaken to stabilize not the dollar but the currencies of other nations.

For 14 years, from 1982 (the second year of the Reagan administration) through 1995 (the third year of the Clinton administration), the ESF's foreign exchange trading was generally quite profitable, suffering small losses in only three years (1982, 1989 and 1991) and a moderate loss in just one (1984). This creditable record began to fall apart in 1996, with by far the largest loss on foreign exchange trading in the ESF's history, followed by another similarly large loss in 1997, and a significant loss in 1998. Good results in the first quarter of 1999 were halved by losses in the second quarter, and further reduced by a smaller but sizable loss in the third, which is also the quarter in which the British gold sales were announced.

Another noteworthy feature of this quarter is the appearance on the ESF's income account of a separate line item for "commissions." No such entry has appeared before or since. The closest historical analogue are the "handling charges on gold" included in the profits line prior to 1978.

While an examination of the ESF's skeletal financial reports cannot possibly prove that it has engaged in efforts to "stabilize" the gold price in recent years, there is nothing in these reports to suggest that it has not. What is more, there is much to arouse suspicion.

As I have suggested in earlier commentaries, official efforts to cap the gold price probably began in late 1995 or early 1996 as the gold price challenged $400/oz. with the deepening of Japan's economic crisis. These dates also coincide with the ESF's transition from profits to losses. Generally speaking, official bodies like the ESF ought to make profits on foreign exchange trading when profits rather than currency stabilization are their objective since they are likely to have relevant information and intelligence unavailable to others. On the other hand, when they intervene to stabilize a currency in opposition to fundamental market forces, experience suggests that large losses are likely to occur. Accordingly, particularly during 1998 and 1999 when the Clinton administration denies making any interventions and when there were no other obvious activities of the ESF that might explain losses on foreign exchange trading, the losses themselves -- especially large ones -- raise questions.

They become even more suspicious when plotted against gold prices over the past two years, where on a quarterly basis and allowing for shorts lags in realizing profits or losses, firm or rising gold prices tend to correspond with ESF losses and falling prices with ESF profits. This relationship does not hold true for the last calendar quarter of 1997 (first quarter of fiscal 1998 for the ESF), but then declining gold prices reflected concern about lower demand and even dishoarding as a result of the Asian financial crisis, which may have impacted the ESF's results adversely as well. Thereafter, rising gold prices in the first four months of 1998 correspond with ESF losses in the second and third fiscal quarters, and falling gold prices to September with a small recovery that month with ESF profits. From October 1998 through the end of the year gold prices remained weak and in declining mode, and the ESF had one of its most profitable quarters.

For the first two months of 1999, gold remained firm at around 290, spiking upward toward $300 in early March. This rally was contained despite apparently good fundamentals for gold, and the price receded to around $280 by the beginning of April. Then another rally began, pushing the price back above $290 at the end of the month, largely powered by increasing doubts that the proposed IMF gold sales would be approved. In the second fiscal quarter (first calendar quarter) of 1999, the ESF lost almost half of its profits from the prior quarter, and its losses continued into the next quarter on a scale that if continued would have pushed it into a loss position for an unheard of fourth straight year.

In early May, just as gold was threatening a sharp rally that many expected would carry it over $300 and perhaps to much higher levels, the British announced their gold sales. For many knowledgeable about gold, this otherwise inexplicable action was the smoking gun, proof that some official scheme was afoot to cap the gold price. In its wake, the gold price declined within two months to under $260, and stayed at these low levels until announcement of the Washington Agreement at the end of September. At the same time, the ESF had another very profitable quarter, closing out fiscal 1999 with a large profit for both the last quarter and the year.

All these events may be coincidence, but they are also consistent with an ESF program of trying to cap the gold price through a program of selling call options or backstopping calls sold by others. Gold loans and short selling by bullion banks are largely responsible for the weak gold prices of recent years. Both activities require access to a deep, liquid and financially credible market where call options on gold can be purchased. See, e.g., The New Dimension: Running for Cover. Absent such a market or its functional equivalent, these activities simply become too risky, especially for prudent, sophisticated players, because they have no means to hedge their risk. At the same time, as the net short gold position grows, writing or selling calls becomes more risky, and premiums tend to rise, eventually choking off both gold loans and short selling. At that point, gold prices should rally, relieving some of the pressure.

However, given its rather large resources relative to the gold market, the ESF could have enabled gold loans and bullion bank short selling to continue past their normal limits by selling or backstopping calls at reasonable premiums when private parties declined to do so in sufficient quantities or at all. A program of this sort would generally, although perhaps with a slight lag for their actual realization, tend to show losses on rising gold prices and profits on falling ones. Nor would it necessarily require access to official U.S. gold reserves, either for sale or leasing. At first, relatively deep pockets and a high tolerance for risk probably would be sufficient.

But ultimately, as the net short position grew and perceptions of risk increased, central banks and others who loan gold would begin to step back. No central bank wants to be caught with a defaulted gold loan. Then the program to cap the gold price would break down without access of some sort to physical gold, such as a friendly central bank willing to step into the breach -- either with bullion for sale or with a willingness to lease notwithstanding the risk. The British gold sales and Kuwaiti gold loan -- both otherwise without apparent rational basis -- fit this pattern.

Given its long-standing culture of secrecy, any ESF scheme to cap the gold price would almost certainly be carried out without notice to Congress, and quite possibly without notice to the Fed either. As to mechanics, a hidden relationship with one or a very few bullion banks would be sufficient. This relationship would give the favored bullion banks an enormous edge in their own gold trading operations, and one that no Chinese wall could likely neutralize.

From the outset, the constitutionality of the ESF has been open to doubt. Its self-funding operations largely immune from effective congressional oversight seem to contravene both the separation of powers and the exclusive control over appropriations vested in Congress. But any scheme by the ESF today to control the gold price would face further legal and constitutional hurdles.

At the same time that it established the ESF, Congress put the gold value of the dollar at $35/oz. and generally prohibited gold ownership by American citizens. Accordingly, Congress set the gold price for the ESF to target, not the Secretary of the Treasury. What is more, by outlawing most private gold ownership, Congress effectively foreclosed trading of gold. Thus there was little likelihood that the ESF would come into conflict with private investors trading gold or gold futures in New York or anywhere else in the country.

Today, of course, the situation is wholly different. Although Congress has left standing an anachronistic official gold price of $42.22/oz., there is no reasonable argument that this figure remains a legitimate target for ESF stabilization efforts. Congress has also repealed the ban on gold ownership. Substantial trading of gold, including bullion and coins, and gold derivatives, including futures and options, now takes place daily in private transactions, over-the-counter financial markets and public commodities exchanges.

Any act by the executive branch -- through the ESF or otherwise -- to set the dollar gold price today, under these circumstances, would be patently illegal and unconstitutional. The public commodities exchanges are regulated under the authority of Congress precisely to assure that they function honestly and fairly for all participants. Congress has effectively declared by its actions that gold contracts on these exchanges should trade in a free market, not one subject to manipulation by the ESF, the Fed or anyone else, including the bullion banks.

The monetary provisions of the Constitution grant to Congress sole and exclusive power to determine the gold value of the dollar. The Supreme Court, to its everlasting shame, has refused to decide whether Congress may constitutionally sever any meaningful link between the dollar and gold or silver. But if there is to be a link, the Constitution vests in Congress exclusive power to define it.

Were I counsel to a bullion bank, my advice would be to avoid like the plague involvement, or even suspicion of involvement, in any ESF scheme to affect gold prices. Activities of this sort could potentially violate a wide array of federal and state statutes, many of which also confer rights of private action on injured parties. Indeed, the blatant unconstitutionality of any such scheme could well deprive participating government officials of a range of defenses ordinarily available when they perform authorized duties in good faith. But many defenses available to the government or its officials would not be available to the bullion banks. In short, if the scheme blew up, their financial exposure could be enormous.

March 31, 2000. Congress: Anything but the Right Questions to the Right Guy

When it comes to manipulation of the gold market, Congress appears just plain scared to ask the right questions to the right guy. In a letter made public yesterday to Congressman Jim Leach (Rep., Iowa), chairman of the House Banking Committee, responding to questions that arose during his Humphrey-Hawkins testimony, Fed Chairman Alan Greenspan again addressed speculation that the Fed is intervening in the gold market: "I can say unequivocally that the Federal Reserve Bank of New York has not intervened in the gold market in an attempt to manipulate the price of gold on its own behalf or for the U.S. Treasury or anyone else." This statement makes unequivocal precisely the interpretation that I put on his response to Senator Lieberman regarding GATA's questions.

If the U.S. Government is involved in manipulating the gold price, it is almost certainly doing so through the Exchange Stabilization Fund, at the direction of the Secretary of the Treasury, using an undisclosed agent or agents, including in all probability Goldman Sachs. Getting to the truth here is not rocket science, although following the gold price after the truth comes out may be. Put Mr. Summers under oath and ask him directly.

However, Mr. Greenspan's statements denying Fed intervention in the gold market, directly or as agent for the Treasury or the ESF, are troubling in two respects. First, clearly Congress is interested in the more general question of whether there is any official U.S. intervention in the gold market. Accordingly, assuming that the Fed is not involved, if Mr. Greenspan knows that the ESF is intervening in the gold market, he has not been completely candid and forthcoming with Congress. Second, if the ESF is intervening in the gold market but Mr. Greenspan has no knowledge of that fact, the competence of both U.S. global monetary policy and the Fed are put in doubt.

As to the first point, it is of course possible that Mr. Greenspan not only has greater knowledge on the subject that his public statements suggest, but also that he has shared this knowledge privately with members of Congress. In that case, the Fed chairman and Congress together are conspiring to keep the real truth from the American people, and Congress is not going to ask Mr. Summers the questions that would give the game away. Instead, the Fed chairman's literally true answers are being used to try to deflect attention away from the subject generally and finesse the need for direct answers about the ESF. This situation, should it in fact be the case, would indicate a high level of concern by everyone involved about the stability of the international payments system in general and the dollar in particular.

The second point raises a less likely but far graver possibility: the ESF is intervening in the gold market but the Fed chairman knows nothing about it. In this event, very serious issues would be raised about the coordination and implementation of U.S. monetary policy as it relates to gold, both domestically where many consider the gold price a good leading indicator of inflation, and internationally where the gold price is a measure of the U.S. dollar's acceptability as a reserve asset. The notion that the President and the Secretary of the Treasury might be engaged in a scheme to con the Fed about the price of gold is worrisome indeed.

More worrisome, however, is the thought that the Fed chairman is so easily conned. Surely, with its resources and contacts, the Fed should be among the first -- not the last -- to sense possible manipulative activity in the gold market. What is more, given the importance of the gold price as a monetary indicator, the Fed should want to investigate and uncover any activity of this sort as quickly as possible. Indeed, if the Fed really believed in a free market for gold and took the necessary steps to assure it, this whole controversy would never have arisen.

March 28, 2000. The ESF: Anything But the Naked Truth on Naked Calls

In a personal letter dated January 19, 2000, to Senator Joseph Lieberman (Dem., Conn.), Fed Chairman Alan Greenspan responded on behalf of the Fed to questions raised by GATA in an ad placed in Roll Call, the Congressional weekly newspaper, on December 9, 1999. His answers were discussed in three prior commentaries, Two Bills: Scandal and Opportunity in Gold, The Greatest Con: The Rubin Dollar, which also discussed some recent official studies on the Exchange Stabilization Fund, and Gold Shenanigans: Suspicion Shifts to the Treasury, which also analyzed the ESF's statutory basis and authority.

Now the Treasury Department has surfaced with two sets of purported answers: (1) a letter dated March 20, 2000, from Marti Thomas, an acting assistant secretary for legislative affairs, to a constituent of Congressman Sherrod Brown (Dem., Ohio); and (2) a letter dated February 23, 2000, from the department's inspector general, Jeffrey Rush, Jr., to Senator Mitch McConnell (Rep., Ken.). Read carefully, neither letter negates in any way the contention that the ESF is involved in the gold derivatives market, still less my suggestion that that it is writing naked call options on gold.

Question 1 in GATA's ad ( read:

Does the Federal Reserve or the Treasury Department, either on their own behalf or on behalf of others, including other government agencies, such as the Exchange Stabilization Fund, lend gold or silver, facilitate the lending of gold and silver, or trade in any securities, such as futures contracts and call and put options, involving gold and silver?

The Treasury Department's responses (

By the Assistant Secretary. The Treasury Department does not, either on its own behalf or on behalf of others, including other government agencies such as the Exchange Stabilization Fund, lend gold or silver, facilitate the lending of gold and silver, or trade in any securities, such as futures contracts and call and put options, involving gold and silver.

By the Inspector General. The Treasury Department does not lend gold or silver, facilitate the lending of gold and silver, or trade in any securities, such as futures contracts and call and put options, involving gold and silver.

By its terms, question 1 identifies the ESF as a government agency separate and apart from the Treasury Department. Given the ESF's statutory history as a sui generis self-financing fund under the exclusive and unreviewable control of the Secretary of the Treasury and the President, this approach appears eminently justified. Not surprisingly, therefore, the assistant secretary adopts it by closely tracking the language of the question in the answer, which refers to the "Treasury Department" as distinct from "other government agencies such as the Exchange Stabilization Fund." Thus the answer states merely that the Treasury Department does not act as agent for the ESF in trading gold or gold derivatives. It says nothing about the such trading by the ESF directly or through other agents, e.g., a bullion bank such as Goldman Sachs.

The inspector general's answer omits any reference to agencies or the ESF. However, in an introductory statement he stated: "We perform annual audits of the United States Mint's Custodial Gold and Silver Reserves and Exchange Stabilization Fund, which are part of Treasury's operations." Thus it is possible that he considers the ESF to be part of the Treasury Department. However, nothing is said about the scope of the inspector general's audits of the ESF. In all likelihood these are confined, like the Congressional appropriations process, to the ESF's administrative expenses, and do not reach its operational funds or market activities. Indeed, given the statutory language governing the ESF and its legislative history, the situation could hardly be otherwise.

Question 9 in GATA's ad read:

Do the Fed or the Treasury Department or any other government agency ever own or deal in derivatives that are connected with precious metals? Do any of these agencies write call options against the Treasury's or Federal Reserve's gold holdings, or write naked call options? [Emphasis supplied.]

The Treasury Department's responses:

By the Assistant Secretary. The Treasury Department does not own or deal in derivatives that are connected with precious metals, nor do other government agencies write call options against the Treasury's gold holdings.

By the Inspector General. No.

Here the assistant secretary does not track the language of the question in the response. Instead, the answer refers only to the Treasury Department, making no mention of any other agency, let alone the ESF. What is more, the answer wholly ignores the reference in the question to writing naked call options on gold. In short, this answer is purposely constructed not to include a denial that the ESF is writing naked calls on gold, the precise charge that I have made in earlier commentaries. Nor does the inspector general's answer add any clarification regarding the ambiguity implicit in his response to question 1.

The Fed's answers not only carried the weight of being a personal response by Alan Greenspan, its chairman, to a sitting U.S. senator, but also were prefaced by a strong general policy statement: "Most importantly, the Federal Reserve is in complete agreement with the proposition that any such transactions on our part, aimed at manipulating the price of gold or otherwise interfering in the free trade of gold, would be wholly inappropriate." The acting assistant secretary of the Treasury Department attempted a similar statement, closing the letter to Mr. Brown's constituent: "More generally, I would like to underline that the Treasury Department does not seek to manipulate the price of gold, silver or other precious metals by intervening in or otherwise interfering with the market." Again, there is no specific reference to the ESF.

Other than the President himself, the Secretary of the Treasury is the only person with authority to speak to the policies of the ESF. His failure to come forward with a policy statement putting his personal prestige on the line as Mr. Greenspan did speaks volumes. Unlike an acting asistant secretary in the Treasury Department, Mr Summers has actual knowledge of the ESF's activities. But Mr. Summers also knows that legalese pushed to its most virulent extreme -- Clintonese -- is a very dangerous tool when employed to mislead a member of Congress. Shading the truth about what the ESF is doing in the gold market by relying on an ambiguous distinction between the Treasury Department and the ESF is simply too dangerous to be a realistic option for Mr. Summers in his communications with Congress, particularly on an important subject of which he has actual, complete and personal knowledge.

What the Treasury Department's responses have done is narrow the controversy. Accepting them as accurate means that the ESF is the only official U.S. government instrumentality yet to be accounted for with regard to allegations of recent manipulative activities in the gold market. Here are three simple questions for Mr. Summers:

1. Within the past five years, has the ESF traded, directly or indirectly, for its own account or through agents, in gold or gold derivatives, including but not limited to writing or selling naked or covered call options on gold?

2. If the answer to question 1 is affirmative and the ESF has traded through agents, who are the agents and on what exchanges or in what markets have they executed transactions on behalf of the ESF?

3. If the ESF has written or sold covered calls, either directly or through agents, what is the source, location and legal ownership of the gold bullion on which the calls were written or sold?

The only persons with statutory authority to answer these questions for the ESF are the Secretary of the Treasury and the President. Anyone else supplying answers must show that they are made with the full knowledge and approval of one or both of these authorized persons.

The responsibility for obtaining answers rests with Congress. What is more, both Democratic and Republican members are now recipients of weasel answers from the Treasury Department. Both major parties in Congress are thus fully on notice of credible, serious allegations that the current administration has turned the ESF into a political slush fund to aid its closest friends on Wall Street, starting with Goldman Sachs, former Treasury Secretary Robert Rubin's old firm, by giving them the inside track on a manipulative scheme to cap the gold price.

What is far more important, however, leading members of both parties are on notice that this alleged scheme is likely the linchpin of this administration's dollar support policy. Should it collapse, as all such schemes do, it is likely to take the dollar with it and plunge the nation into a financial crisis the likes of which have not been seen since the Great Depression. Congress has a choice: to exercise its constitutional responsibilities and demand the truth about the ESF, or to indulge explanations about it from lower level officials phrased in Clintonese. But either way, if the ESF is engaged in a scheme to support the dollar by manipulating the gold price, the piper will be paid: a lot now, or more -- maybe much more -- later.