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What is the Government Hiding
By Patrick A. Heller

The legislative effort to audit the Federal Reserve took an interesting, though ugly, turn last week. On Wednesday, the entire Senate was considering an appropriations bill. Sen. DeMint, R-S.C., saw that several amendments had been added to the bill for various authorizations of audits to be performed by the Government Accounting Office. So he introduced an amendment to the appropriations bill to add the bill calling for the GAO to audit the Fed (DeMint is a co-sponsor of the original "audit the Fed" bill asking for an audit).

When this happened, Sen. Ben Nelson, D-Neb., objected that this violated Senate Rule 16, which prohibits legislative amendments to appropriations bills. The Senate president immediately agreed and struck this particular amendment from the appropriations bill.

When this occurred, DeMint kept fighting. He mentioned that the "audit the Fed" bill had widespread bipartisan legislative support. He pointed out that Senate rules were frequently violated, which they are. He then specifically named each other GAO audit legislation amended onto this appropriations bill. The Senate president acknowledged each time that these amendments violated Senate rules, but he let them remain as part of the appropriations bill.

The implication of this development is that the Democratic leadership in Congress and in the White House does not want the public to know what an audit of the Federal Reserve would reveal. One likely revelation would be just how much gold the U.S. government really owns versus what it tries to claim it owns.

Last Thursday, in testimony to Congress, Federal Reserve Vice Chair Donald Kohn stated that if the public became more aware of the Fed's actions, should this bill became law, that it could result in higher consumer prices, higher interest rates and a decline in the credit rating of the United States government. The question not asked of him is why is the Fed taking actions that could cause such a result - but only if the public found out what the Fed did.

Also last week, Goldman Sachs reported a theft of one of the company's proprietary trading programs, allegedly taken by one of the employees who helped create it. In reporting the theft, Goldman Sachs said that usage of this program could make it possible for the user to manipulate markets unfairly.

Let me be clear about this. Goldman Sachs admits that they have trading software that could be used to unfairly manipulate markets, but they don't admit to using it for such activities. The unasked question is - why else would they bother creating such software?

Already, there are theories of what Goldman Sachs has been able to do with such software and why they have made a public stink about the alleged theft rather than kept quiet. Last Wednesday, one publication stated that the software enables Goldman Sachs to assist the President's Working Group on Financial Markets (popularly called the Plunge Protection Team). Supposedly, this software reviews trading orders on the exchanges before they were committed. In the split-second before the orders are committed, Goldman Sachs' program can enter trades to take advantage of the change in the market before other traders learn of these developments.

Other theories speculate that the derivatives markets may soon expose major losses with Goldman Sachs wanting to pre-emptively deflect future blame that they might receive when this occurs.

Last Thursday, Rep. Carolyn Maloney, D-NY, who is the chair of the Joint Economic Committee, revealed to this committee that the $3.5 trillion of commercial real estate debt is a ticking "time bomb" and a "looming crisis" as $700 billion of this debt must be refinanced by the end of 2009. She said that there could be a second wave of huge losses at large U.S. banks.

There are significant stories flying around London and Washington that extremely bad news is going to be forced into the public eye at the end of August or in September. Among the kinds of news expected to be revealed are further major losses in the residential real estate mortgages, credit card debt and the commercial real estate market. Multiple sources are indicating that if you want to be able to purchase physical gold and silver, you probably should plan to take delivery by Aug. 20 or so at the latest (actually there is apparently some specific significant financial news that will be publicly disclosed on July 22 that would have an impact on precious metals markets, but I have no details what this involves).

Adrian Douglas, a professional commodity analyst and member of the Board of Directors of the Gold Anti-Trust Action Committee (GATA), published an analysis Saturday revealing his discovery why the COMEX gold market reports on trading activity and the movement of metals were not making sense. In addition to being able to settle COMEX contracts by either delivering physical metal or paying cash, a gold contract can be settled by "substantially the economic equivalent" of gold. What has happened is that many COMEX gold contracts are being settled with shares of gold exchange-traded funds (ETFs). In theory, these ETFs own physical gold covering all of the outstanding shares, typically 1/10th ounce of gold per share. However, there are so many loopholes in the ETF contracts that allow the managers of the fund to effectively hold paper contracts rather than physical metal that there is significant doubt that the ETF could deliver gold to redeem outstanding shares. The rules of the COMEX silver market do not (yet) allow contracts to be settled with ETF shares.

This strategy of delivering "potentially paper gold" to satisfy contracts requiring delivery of physical gold has now been adopted by the Tokyo Commodity Exchange and Tokyo Stock Exchange. Prices of precious metals took a major hit last week. The G-8 Group of the world's largest economies plus Russia met in Rome last Wednesday through Friday. One of the subjects certain to be under discussion was the deteriorating position of the U.S. dollar as the de facto world reserve currency. The U.S. government has a strong interest in preventing any discussion of alternatives to the U.S. dollar. One way to "show" that the dollar is still strong and doesn't need any replacement is to knock down gold and silver prices significantly just before the meeting started. Funny - that is exactly what happened.

It is difficult to see developments such as these and still have any justification for the U.S. government's claim that there is no manipulation of the gold and silver markets.

 



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