Dear Chris:

In a recent GATA dispatch you wrote:

"The gold price is almost entirely a matter of how much gold the central banks want to dishoard, how quickly they want to dishoard it, and whether they will want to keep any for use in the economic order that will follow the exhaustion of their supplies and their inability to use gold to manipulate financial markets."

I agree with your point and I'm wondering: Do we really know how much gold is in those Federal Reserve banks? Is that public information? And if the Fed needed more gold to sell to prop up the dollar, couldn't it simply have an arrangement to borrow from Fort Knox and sell that too? Of course, that's if there really is any gold left there. But if all the gold is on paper and the Fed's inventory is not open to public inspection, their scam is almost guaranteed, no?

Also, don't most contracts not take physical delivery of gold? So what's to stop the Fed from winning the game if you can't call their bluff?

-- Jim

Dear Jim:

Thanks for your note and your questions. Let's see if this helps.....

Do we know how much gold is in those Federal Reserve banks?

Well, the U.S. government says the Treasury Department, not the Fed, is the custodian of U.S. gold reserves, though the Fed acts as the Treasury's agent in regard to gold and a lot of gold is kept deep under the New York Federal Reserve Bank. But exactly how much gold is in U.S. government vaults and exactly who owns it at any one moment are always huge questions.

The Treasury will sometimes report gold reserves, but the encumbrances on those reserves are NOT reported. The evidence GATA has compiled argues strongly that a great part of the U.S. government's gold reserves has been swapped for the reserves of other countries, which in turn have leased or sold their gold into the market to suppress the price, providing cover for the U.S. government, which would have a hard time explaining its scheme while affecting to believe in free markets.

That is, much Western European gold is now probably held at U.S. government vaults -- not only the New York Fed, but also West Point and maybe even Fort Knox ... if, indeed, Fort Knox contains anything besides records of outgoing shipments. Public inspections and serious audits of gold reserves seem not to be allowed ANYWHERE among the major countries claiming to have gold reserves.

For far from being a quaint antique, Keynes' "barbarous relic," gold seems to be the secret knowledge of the universe.

We're playing with something far hotter than fire here -- the key to all the money and power in the world and the measure of all labor and physical possessions.

No, the scam probably can NOT go on forever, since, in the end, real metal will win out -- at least as long as gold's private ownership remains legal in any significant jurisdiction, as seems likely, thanks to China and India. (Funny, isn't it? Liberty now relies to a great extent on the right policy of the communist regime in China, just as, back in 1778, it relied largely on the right policy of the Bourbon monarchy in France, without which the American Revolution would have failed.)

Eventually the U.S. government and its allied governments will run out of gold, or, more likely, those allied governments will refuse to continue to function as the U.S. government's secret agents in gold leasing and gold selling, realizing that they have little interest in going bankrupt just to buy a little more time for the Americans to stave off acknowledgement of their own bankruptcy.

Indeed, those allied governments are probably already withdrawing from the gold price suppression scheme. That seems to be what the Washington Agreement was about: putting a gradual end to the European central banks' dishoarding of gold and allocating their remaining spare gold to the favored financial institutions that, at the central banks' encouragement, went into the gold carry trade -- had shorted gold and used the proceeds to buy financial paper. Thus the central banks seem to be helping those financial institutions to cover their gold shorts without forcing them into the market to buy gold in massive amounts and thereby exploding not just the gold market but also the currency and bond markets.

Yes, few of the gold contracts on the commodity exchanges are settled in metal. But some are, and even if none were, the price of real gold would manifest itself elsewhere, wherever real gold was bought and sold, even if in secret. The evidence long has been that the price of real gold in any quantity -- in London, Bombay, Dubai, and Shanghai -- is substantially higher than the paper price reported on the commodity exchange in New York, where the price suppression scheme is concentrated.

For years now a lot more gold has been consumed by the market than has been produced by miners. The difference has been covered by central bank dishoarding -- and that, as written here before, is, for the time being, the ball game.

For how much longer? Well, the gold price has been in a steady uptrend since May 2001, as this chart at Kitco shows:

Indeed, the chart suggests that no one buying gold and holding it longer than six months since May 2001 could have lost on the transaction, at least in U.S. dollar terms. Gold is up about 50 percent in U.S. dollars in those four years, an average of 12.5 percent per year -- pretty good for a risk-free investment.

That is, the gold game already seems to be coming to an end. So why aren't we all happier? Probably because so many of us are buying too many mining shares on margin and not enough metal!

-- cp