Federal Reserve And ETF Gold Holdings - Let's Audit The Federal Reserve

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Includes: AGOL, GLD, IAU, SGOL
by: Richard Shaw

From Federal Reserve Act - Section 14 - Open Market Transactions:

Dealings in, and Loans on, Gold
Every Federal reserve bank shall have power:
(A) To deal in gold coin and bullion at home or abroad, to make loans thereon, exchange Federal reserve notes for gold, gold coin, or gold certificates, and to contract for loans of gold coin or bullion, giving therefor, when necessary, acceptable security, including the hypothecation of United States bonds or other securities which Federal reserve banks are authorized to hold;

IMF Gold Reserves Database:

The IMF maintains a database of self-reported gold reserves held by each nation.

There has not been a public audit of gold reserves in the United States since 1955. Treasury has resisted requests to perform one on the basis of (1) no need, (2) to much work, and (3) too much expense.

According to the self-reported data, the United States holds 8,133.5 tonnes as of the end of 2010, and that gold represented about 3/4 of the total U.S. reserves.

Federal Reserve Gold Reserves Data:

This is the data available from the Federal Reserve of St. Louis on U.S. gold reserves (presumably, this shows no dealings in gold since 2006).

The amount of gold reported to the IMF by the United States, makes it the largest sovereign holder of gold in the world, with Germany, IMF, Italy, France and China following.

Gold ETS:

The major gold ETF sponsors have had the vaults of their custodians audited by "The Inspectorate" a subsidiary of Veritas Corporation (Houston, TX). In each case, The Inspectorate issued a report that the vaults contained the amounts and purity of gold identified by the funds.

GLD is reported at 99.5% to 9.9% purity with 39,167,616.813 Troy ounces held in the London vault of HSBC (as of March 25, 2011).

IAU is reported at 99.9% purity with 5,515,306.290 Troy ounces held at the New York and London vaults of JP Morgan, and the Toronto vault of Scotia Bank (as of December 9, 2011).

SGOL is reported at 99.5% to 99.9% purity with 1,065,405.408 Troy ounces held at the Zurich vault of UBS (as of December 31, 2011).

AGOL is reported at 9.5% to 99.9% purity with 44,575.000 Troy ounces held at the Singapore vault of JP Morgan (December 31, 2011).

Collective ETF Holdings:

Converting Troy ounces to tonnes at 32,150.7466 ounces to the tonne, those four ETFs held 1,424 tonnes of gold bullion. That would make them collectively the 6th largest gold hoard in the world, behind France and before China, and about 1/2 of the holding of the IMF.

We are pleased that some independent views are being applied.

Wouldn't it be nice if the U.S. Treasury would open its vaults to inspection too?

We don't know if any other country has public audits of their gold holdings. However, since gold holdings may be important to nation-to-nation transactions, public audits make sense to us.

The Swiss Gold Initiative:

Swiss gold is held in New York by the New York Federal Reserve. There is a movement in Switzerland called the "Gold Initiative", seeking to physically repatriate their bullion reserves, to forbid further sales of Swiss gold, and to require that 20% of Swiss currency be backed by reserve bullion.

We wonder if Treasury resistance to an audit of reserves in the U.S. is partially responsible for such a movement.

The restriction against selling gold and backing currency with gold could be done with or without physical repatriation. We presume the reason for Swiss gold being in the U.S. is related to WWII risk of Nazi confiscation, and perhaps subsequent fears of Soviet invasion during the cold war. That sort of risk is minimal today, and holding Swiss gold in Switzerland would certainly appeal to us if we were Swiss nationals.

Hugo Chavez:

Venezuela's Chavez has been repatriating bullion from the New York Fed, and well he should from his perspective. Scenarios in which his government could be sanctioned and denied access to its holdings in the U.S. are quite real.

Bundesbank:

Germany's Bundesbank stores a substantial portion of their gold reserves outside of the country, including a large fraction with the United States Federal Reserve. There is a movement there for repatriation as well.

Repatriation Is No Big Deal:

It shouldn't make any difference to the United States if all gold held at the Federal Reserve for other nations were to be repatriated, if in fact the Fed is no more than custodian. Certainly, those who are frightened of confiscation (other than thugs like Hugo Chavez) should have no cause for concern leaving it with the U.S. Confiscation would be an act of war for all practical purposes and therefore highly unlikely, although not physically impossible.

Lack of a Federal Reserve Holding Audit Could Be A Big Deal:

Unwillingness to audit the Federal Reserve gold holdings could become a big deal, at least politically.

Since the government regularly raids designated use, segregated accounts with impunity to fund general expenses, and objects to auditing gold holdings, it may be reasonable to doubt whether all of the reported gold reserves are still held at the 1955 audit level.

Let's face it, Social Security taxes have been diverted the general fund. Highway taxes on fuels have been diverted to the general fund, at both the federal and state level. Cigarette class action penalty payments to the states that were intended for anti-smoking campaigns have been diverted to general expenditures. Crisis bailout funds intended for "shovel ready" projects were used in great part to maintain unionized government employment without federal objection. Bond holders' fundamental rights to first lien in bankruptcy were ignored and abrogated by the federal government in the auto bailouts. Dollar convertibility to gold was simply terminated with no citizen recourse. And, gold was forcibly confiscated from citizens by federal order in 1933.

It is not entirely appropriate to trust politicians for decades to have done the right, fair and appropriate thing without any audit. If politicians were totally trustworthy, there would be no need for checks and balances built into government structure (executive, legislative and judicial) -- even with that, they get away with far too much.

We say auditing gold reserves is the right and reasonable thing to do.

The gold is most likely there, but if so why not agree to an audit. The cost and inconvenience argument is silly, and therefore gives rise to doubts.

It Is And It Isn't:

If gold has monetary value, then we should audit it and make the total known. If it has no monetary value, the we should sell it to reduce national debt.

The Fed Chairman and the Treasury speak out of both sides of their mouths. They say it is not money, but they report it as money in their reserve statistics at official value, based on international agreements. It cannot be both money and not-money at the same time.

Federal Reserve Definition of "Gold Stock":

"Factors Affecting Reserve Balances" (H.4.1) reports the Federal Reverves "gold stock". They define it this way;

The gold stock of the United States is held by the Treasury and consists of gold that has been monetized: the Treasury has issued certificates reflecting the value of the gold to the Federal Reserve in return for a credit for the same dollar value to the Treasury's accounts. The gold stock also includes unmonetized gold, against which certificates have not been issued by the Treasury (although virtually all the Treasury's gold has been monetized since 1974).

The value of the gold stock is recorded on Federal Reserve and Treasury books at $42.22 per troy ounce, the so-called official U.S. government price established by international agreement and confirmed by Congress in 1973. If the Treasury buys or sells gold, however, the purchase or sale is executed at market prices.

Acquisition of gold, and its monetization by the Treasury, can affect reserve balances at depository institutions. Acquisition increases reserve balances "Gold stock" and "Treasury cash holdings" rise, but the "U.S. Treasury, general account" balance falls. Monetization leaves the gold stock unchanged, but reduces Treasury cash holdings and increases the Treasury's general account. Monetization itself does not alter reserve balances, but these balances increase when the Treasury spends the proceeds or shifts the proceeds to the accounts that it maintains with depository institutions.

Disclosure: QVM has positions in GLD and SGOL as of the creation date of this article (March 10, 2012).

Disclaimer: This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. Do your own research or obtain suitable personal advice. You are responsible for your own investment decisions. This article is presented subject to our full disclaimer found on the QVM site available here.