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Federal Reserve Governor Confirms Fed Gold Swaps
By Patrick A. Heller

Five months ago, the Gold Anti-Trust Action Committee (GATA), filed a second Freedom of Information Act (FOIA) request with the Federal Reserve System for documents from 1990 to date having to do with gold swaps, gold swapped, or proposed gold swaps.

On Aug. 5, The Federal Reserve responded to this FOIA request by adding two more documents to those disclosed to GATA in April 2008 from the earlier FOIA request. These documents totaled 173 pages, many parts of which were redacted (covered up to omit sections of text). The Fed's response also noted that there were 137 pages of documents not disclosed that were alleged to be exempt from disclosure.

GATA appealed this determination on Aug. 20. The appeal asked for more information to substantiate the legitimacy of the claimed exemptions from disclosure and an explanation on why some documents, such as one posted on the Federal Reserve Web site that discusses gold swaps, were not included in the Aug. 5 document release.

In a Sept. 17, 2009, letter on Federal Reserve System letterhead, Federal Reserve governor Kevin M. Warsh completely denied GATA's appeal. The entire text of this letter can be examined at http://www.gata.org/files/GATAFedResponse-09-17-2009.pdf.

The first paragraph on the third page is the most revealing. Warsh wrote, "In connection with your appeal, I have confirmed that the information withheld under exemption 4 consists of confidential commercial or financial information relating to the operations of the Federal Reserve Banks that was obtained within the meaning of exemption 4. This includes information relating to swap arrangements with foreign banks on behalf of the Federal Reserve System and is not the type of information that is customarily disclosed to the public. This information was properly withheld from you."

This paragraph will likely be one of the most important news stories of the year.

Though not stated in plain English, this paragraph is an admission that the Fed has in the past and may now be engaged in trading gold swaps. Warsh's letter contradicts previous Fed statements to GATA denying that it ever engaged in gold swaps during the time period between Jan. 1, 1990 and the present.

If the Fed had no such gold swaps during this period, their initial response or Warsh's letter would simply have said so. Although this damning paragraph does not specifically state that it refers to gold swaps, both of GATA's FOIA requests, the appeal and Warsh's letter are explicit that the only swaps under discussion are for gold.

In theory, gold swaps should have no effect on the long-term price of gold. Gold swaps merely refer to the exchange of matching amounts of gold that are delivered in different locations or at different times. For instance, central bank A could swap a ton of gold with central bank B. In this scenario, central bank A may deliver this ton of gold to central bank B or to another party to fulfill an obligation of central bank B. Central bank B would at some point deliver a ton of gold to central bank A.

Central bank gold swaps could easily be used to surreptitiously hide gold dumped on the physical market to suppress the price of gold. Here's how. In the previous example, when central banks A and B agree to deliver one ton of gold on behalf of the other bank, both of these central banks are allowed (and were required, until recently) by the International Monetary Fund to continue to report the gold they have delivered as if it were still in their respective vaults. While this is being done, each central bank would be free to sell onto the physical market the gold received in the swap from the other bank. That could increase the amount of physical gold available on the market, with neither central bank reporting any sale.

In most instances, swaps are short term, which is why the net impact should be negligible. If the swapped gold were replaced in a few weeks or months, the replacement of the gold would have the effect of decreasing the supply of physical gold to cancel out the earlier increase in supply.

But what if the swaps do not mature for a very long time?

Over the past 10 years, GATA has accumulated a significant amount of circumstantial evidence that the U.S. government, in conjunction with the Federal Reserve System, has secretly arranged to sell or lease central bank gold onto the physical market. Although there have been some attempts at refutation of particular words in the compilation, there has been no evidence produced to disprove GATA's contentions. Despite the lack of contrary evidence, there are a number of so-called gold market experts who refuse to acknowledge that any central banks are involved in activities such as gold swaps undertaken to suppress the price of gold. Now that Federal Reserve governor Warsh has admitted that the Fed has lied in the past about engaging in gold swaps, what excuse will these "experts" now use to ignore GATA's research?

Warsh's letter may end up being the evidence needed to overcome the U.S. government's efforts to avoid clearly and accurately reporting on its gold holdings. If so, there is a significant likelihood that the public would be stunned to learn how much of the U.S. gold stockpile is gone. Any such news would lead the price of gold to explode upward (and for the value of the U.S. dollar to fall sharply).


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