New Treasury Documents Reveal Loans, Swaps of U.S. Gold
October 18th, 2007U.S. gold reserves in play?
I don’t really understand how this would work. The article says that the gold is being sold into the spot market. Doesn’t the gold have to be replaced? How do the parties who borrowed the gold pay it back? They would have to buy it back again, presumably lower, right? If that’s what’s happening here, that seems like a VERY risky bet. What if the criminals who are doing this get squeezed higher? Woops.
Via: Goldseek:
The US Treasury quietly made a subtle change to its weekly reports of the US International Reserve Position, which includes the US Gold Reserve. This change was first made on May 14th. The differences can be seen by comparing the report’s old format release on May 8th to the new format used the following week. Here are the links:
http://www.treas.gov/press/releases/2007581342179779.htm http://www.treas.gov/press/releases/20075141738291821.htm
Note the additional description of gold provided in the new reporting format. It says the US Gold Reserve is 261.499 million ounces and importantly, that the gold is now reported “including gold deposits and, if appropriate, gold swapped†[emphasis added].
This description provides clear evidence that the US Gold Reserve is in play. Gold has been removed from US Treasury vaults and placed on deposit, presumably in the couple of bullion banks the Treasury has selected to assist with its gold price capping efforts.
Gold placed on deposit gets loaned out by these bullion banks, and then sold into the spot market to try capping the gold price. The same thing happens with swaps, but the vague language in the note to the Treasury reports makes it uncertain whether they are in fact being used at the moment.
It is noteworthy that this change of accounting occurred in May. Could it be that the gold cartel had to dip into the US Gold Reserve to accommodate the big gold buybacks of hedge books that Lihir and others completed at that time?
The timing is also conspicuous because it occurred about the time GLD, the exchange-traded fund, showed a reduction of 23 tonnes of metal. Did GLD need to borrow gold from the US Treasury to replenish its stock? This was also a period when large deliveries and exchange-for-physicals were taking place on the Comex.
More: GATA
Research Credit: Pookie
the way it works is the Treasury “loans” the Gold out to some specific banks who are authorized to “borrow” the Gold from the Treasury.
The Gold is loaned out with a very low interest rate. The banks then take the gold and sell it into the spot market, they supposedly make a profit off of the differential between the price they get in the spot market for the gold and the interest they pay on the gold they have borrowed.
“Doesn’t the gold have to be replaced?” hahaha. Not if you call it “deep storage” gold. It’s all about semantics and perception. Or call it fraud, if you’re so inclined.
skye is partly right.
The treasury loans the gold to specially-authorized “bullion banks”, who pay a low rate of interest, like 1%/yr. The stated goal from the treasury’s perspective is to turn an otherwise static asset (gold) into an income-earning one. After the gold has been loaned, it it still declared as an asset on the treasury’s balance sheet.
The bullion banks then sell the gold into the spot market, raising a bunch of cash. At the same time, they buy the gold back in the futures market (for delivery in some future month). Gold in the futures market is normally priced above the spot price by a reasonably low percentage — currently about 4% for contracts one year out. At contract expiration, the process can be repeated. This is a close-to-zero risk set of transactions for the bullion bank.
The net result is that the bullion bank ends up getting a low-interest loan — 1% or so for the gold, plus 4% or so for the futures market transaction, or 5%/yr total.
The resulting cash can then be used as bank “reserves”, in the same way that a loan from the Fed’s discount window can be. So the bullion bank can now lend out about 9 times as much money as it raised in the gold transactions (since reserves only have to be 10% or so of loans). If the bank earns, say, 7% on the loans, the net earnings can be huge (9 x 7% = 63% on the amount raised from the gold sale).
As I understand it, one difference between this approach and borrowing from other banks or from the fed itself is that the gold is a longer-term loan, where the others are intended to be short term (the fed recently made a big deal about extending the term of their loans to 30 days).
The result on the gold market is a depression in the spot price, and an increase in the futures price. So this technique has been used as a way of temporarily supressing the spot price of gold without “officially” selling any — but it can only work as long as there is a steady flow of new gold into the system. Once the flow stops, market prices will eventually equalize due to the offseting purchases in the futures market.