How Much Gold Does the US Have In Its Reserves?

This is a subject that comes up periodically.  Since the Fed's attorney recently answered Ron Paul's query, correctly I might add, that the Fed has no gold under its control, I thought I would reprise a previous blog entry on the subject of the US gold reserves.

The real question is not whether or not the Fed has any gold or direct control of it, which it does not, but rather, does the Fed have any knowledge of or any participation in gold swaps, leases or sales to foreign entities.

There is anecdotal information and plenty of stonewalling by the Fed to suggest that the answer to this question is not a straightforward 'no.'

China Should Sell US Treasuries When the Market Is Strong (Like Now) and Diversify Its Reserves

If the Treasury market is robust, as it is now, China might be able to sell its Treasuries without disrupting the market, but it would also then have to sell dollars to diversify into other assets in constructing a portfolio. This might show up in the value of the dollar if not in the bonds.

I wonder how much of that BIS / IMF gold is being diverted to China in private sales in order to allow confidence to remain high in the fiat, and to not disrupt the public markets with large price fluctuations. The US banking system has a significant risk exposure to the gold and silver markets through a few of its banks who are leverage short to the hilt.

This same story prompted Max Keiser to write the following in Game Theory and Gold: Countdown to Meltup

"Soon enough, a G20 nation will announce a full or partial gold backed currency forcing every other country to either reply with their own gold backed currency – or equivalence – or risk 100% capital flight."

Reuters
China should cut U.S. Treasury holdings: economist
by Langi Chiang and Alan Wheatley
BEIJING Sun Jul 18, 2010 9:24pm EDT

(Reuters) - China should cut its holdings of U.S. Treasury securities when market demand is strong, a prominent economist said in remarks published on Monday.

Beijing reduced its Treasury holdings in May by $32.5 billion to $867.7 billion, but it actually bought a net $3 billion in long-term Treasuries and remained the largest single holder of U.S. government debt, the Treasury reported on Friday.

Yu Yongding, a former academic adviser to the central bank and now a professor with the Chinese Academy of Social Sciences, said Beijing should invest in assets denominated in other currencies as well as other financial instruments and real goods.

"Although assets in other currencies and forms are not an ideal replacement for U.S. Treasury bonds, diversification should be a basic principle," Yu wrote in the China Securities Journal.

"When demand for U.S. Treasury securities is strong, it's a rare opportunity for us to gradually pull back. That way, it will not have a big impact on prices and China will not suffer too much," he said.

Zhang Monan, a researcher with the State Information Center, a think tank under the powerful National Development and Reform Commission, told the paper that China should invest more of its $2.5 trillion of foreign exchange reserves, the world's largest stockpile, in hard assets such as gold.

Official Gold Reserves As of June 10, 2010, and Truths Yet to be Told

It is important to remember that these are the 'official' numbers. And it does not show how the reserves are 'encumbered' by leases and loans.

For example, there is circumstantial evidence that the Reserve Bank of Australia loans up to 100% of its gold reserves to the bullion banks who subsequently sell it, and then 'owe' it to the Bank and the people of Australia. The trick of course is the significant counterparty risk in the event of a serious short squeeze.

And they are not the only ones. Since this is an asset owned by the people, a timely and transparent accounting by the Treasuries and the Banks is something that the people of every nation obviously deserve. Whether the financial engineers, who enjoy experimenting with Other People's Money and doing favors for their private sector cronies, will ever willingly provide that information is another story altogether. It will almost certainly be under force of law, or an independent audit.

World Gold Council
Official sector gold reserves as at June 2010

European central banks sold virtually no gold over the past quarter, save a small amount for minting gold coins. Total sales by European central banks have amounted to just 1.8 tonnes since the third central bank gold agreement began in September of last year. The only sales of note made via CGBA3 have been by the IMF, which has sold 38.7 tonnes since mid-February. We expect the IMF to sell at a similar pace this quarter.

Outside of the agreement, the main purchases reported over the last quarter have been by Russia and the Philippines, both of which have long-standing gold buying programmes. The Central Bank of Russia bought another 26.6 tonnes of gold over the past quarter, taking its total gold holdings to 668.6 tonnes or 5.5% of its total reserves, and remains the 9th largest official sector gold holder. The Philippines central bank bought 9.5 tonnes of gold in March, taking its gold holdings to 164.7 tonnes or 13.7% of total reserves.

The Saudi Arabian Monetary Authority reported last quarter that “gold data have been modified from First Quarter 2008 as a result of the adjustment of the SAMA’s gold accounts”, meaning SAMA’s gold reserves are now reported to be 322.9 tonnes or 2.8% of reserves, from 143 tonnes or 1.2% previously....

What Have They Been Doing Since the Financial Crisis Began?

"China is considered a stealth buyer of gold, said Boris Schlossberg, director of currency research at Global Forex Trading. As the world's largest producer of the metal, China often buys gold from its own mines and doesn't report those sales publicly. But in April 2009, China did admit to having added 454 tonnes, or a 76% increase, to its reserves since 2003.

Analysts suspect the country is continuing to buy gold and could in fact, be the world's largest buyer consistently. It simply doesn't reveal it's pro-gold stance proudly, however, because China is also the world's largest holder of U.S. Treasurys.

Announcing an aggressive gold buying spree is not in China's best interest because, for one, it might push gold prices higher. Secondly, it could devalue the U.S. dollar, which would subsequently lessen the worth of the country's portfolio of U.S. government bonds, Schlossberg said."

Central Banks Join Gold Rush - CNN

Just as there are stealthy buyers, how can one refuse to acknowledge the body of evidence that there are also stealthy sellers, hiding behind official secrecy, derivatives arrangements, leases, and accounting frauds that will shock and anger the real owners of the assets when their hidden and conflicted dealings with their cronies in the private banking sector are revealed?

Anyone at this point who says that the Fed would never engage in such obviously compromised and conflicted transactions, and then go to great lengths to hide them, has either not been reading the real news, or is as compromised as the central bankers and their cronies in government and the mainstream media are, morally and intellectually.

And if they will allow the equity markets to be manipulated, as any even modestly sophisticated trader with decent access to tools must now recognize and admit, why would they hesitate to enable and encourage the manipulation of the sovereign bond markets, and those markets that affect them, which are by far the most important markets of all?

The world is not big enough for them to find a place to hide from justice after the truth is revealed. So they will lie and obstruct, extend and pretend, increasingly desperate for power, corrupting all that is corruptible, until the very end, and the final downfall and collapse. And then will come the crocodile tears, and the claims of ignorance, and finally weak apologies that they thought they were doing the right thing, but were honestly mistaken.

Such is the case in all control frauds, white collar crimes, official corruption, and Ponzi schemes.

The banks must be restrained, the financial system reformed, and the economy brought back into balance, before there can be any sustained recovery.

When At First You Don't Succeed, Bring In the Reserves

Someone asked why Bernanke seemed so positive about the US recovery, and what he would do if his prediction turned out to be incorrect.

The first answer is rather straightforward. He is 'jawboning' or trying to increase confidence in the system to motivate businesses to spend and consumers to buy. The Fed can only set the playing field, but the players have to be confident enough to take the field. We think he is underestimating the neglect that the American consumer has taken over the last twenty years in terms of their overall poor condition (real income), and the disrepair of their equipment (household balance sheets), not to mention the rocks and snares and pitfalls remaining on the field from the gangs of New York and the economic royalists.

But let's assume Bernanke's first major gambit does falter. What is he likely to do next?

Beranke's Fed does have a printing press, and he has been using it as we all know. Here is a chart showing the expansion of the credit side of the Fed's Balance Sheet. This is from the top line labeled "Reserve Bank Credit" from the weekly H.41 report which is becoming more popularly followed these days. If one adds the Feds gold holdings, currency in circulation, and Special Drawing Rights, we get the Total Factors Supplying Reserve Funds.

http://www.federalreserve.gov/releases/h41/Current/



So what would Ben do for "Plan B?" Would he merely add more programs, expand the Fed's Credit Items even more aggressively?

There was an important function added to the Fed's bag of tricks during this crisis that has not received sufficient attention perhaps: their ability to pay interest on reserve funds on deposit with the Fed from the Member Banks.

As can be seen from this next chart, this amount is now substantial running close to a trillion dollars. A portion of this would be characterized as 'excess reserves.' The Fed should be able to motivate banks to use these reserve by adjusting the riskless interest rates they pay.

This was a much desired tool by the monetarist Fed because it enabled them to expand their Balance Sheet and add a significant amount of credit to the banks system immediately, but to keep 'a bit of a leash' on the downstream effects of this liquidity even after it was deployed.

As the Fed's interest rate remains sufficiently high, the reserves, especially the excess reserves, remain in the banking system, and are not deployed actively as loans and inflationary additions to the financial system.

The Fed issues an H3 report, Aggregate Reserves of Depository Institutions and the Monetary Base. In their latest report, they characterize $708.5 Billion of these reserves as 'Excess Reserves.'

So, what we might expect to see is the Fed, as the banking system stabilizes after perhaps some new programs and credit facilities, begin to slowly unleash these excess reserves by reducing the interest to the Member Banks, which would lower the bar and motivate them to engage in more commercial loan activity.

We think one problem is that the banks have more options than merely keeping their excess capital at the Fed or loaning it out to private companies.

Certainly Goldman Sachs has shown that it can defy all the odds and make millions each day by aggressively playing the equity, bond and credit markets. It is also more likely that banks would be inclined to invest their excess capital through acquisitions of other banks, which might represent a moral hazard in creating fewer, and more "too large to fail" institutions.

Therefore we might see the first serious moves towards financial reform before the Fed begins to really unleash the liquidity which they have created in the banking system.

There is of course also their monetization of Treasury Debt, to support the stimulus programs being run from the fiscal side of the US financial apparatus. That would be included in the expansion of their Balance Sheet, and we would expect that to continue on at the very least indirectly, if not overtly on the Fed's balance sheet.

An Aside on the Gold Stock of the Fed

By the way, one method the Fed might use to immediately expand its Balance Sheet would be to recognize that their gold stock is significantly undervalued.

In the H.41 Report, the Fed shows a credit of $11 billion dollars in Gold Stock held primarily in New York, Chicago, Atlanta, and San Francisco, with lesser amounts at each of the Regional Banks. This gold is part of the collateral against the Federal Reserve Notes in circulation, and has been valued at an official rate of $42.22 per troy ounce for many years.

1. Gold held "under earmark" at Federal Reserve Banks for foreign and international accounts is not included in the gold stock of the United States; see table 3.13, line 3. Gold stock is valued at $42.22 per fine troy ounce

By calculation the Fed has 261,511,132 fine troy ounces on its books. If the Fed revalued their gold stock at a more reasonable market price of let's say $1000 per ounce, then this would immediately add $261 billion to the Fed's Balance Sheet IF the gold is really held by the Fed without encumbrances.

One has to wonder why the Fed has never taken the revaluation on its Balance Sheet for gold since the value of $42.22 is so clearly an historic artifact. They perform much more market based calculations for the Special Drawing Rights and their Foreign Exchange holdings. One certainly does not need to sell the gold in order to monetize it, since that has already been accomplished, albeit at a much lower rate.

One can only wonder.

Federal Reserve H3.1.2 US Reserve Assets