Thats right. The Fed owns NO gold. Zero, zip, ziltch.
For those of you who did not watch yesterday’s monetary policy hearing in the house of representatives, you most likely missed this bombshell exchange between Federal Reserve lawyer Scott Alvarez and committee chairman Dr. Ron Paul. My jaw literally dropped when I heard the Fed’s general counsel declare that the Federal Reserve owns no gold. After 1934, Alvarez explains that the Fed handed its gold over to the Treasury in exchange for gold certificates. When pressed further, Alvarez noted that the gold certificates do not represent any interest whatsoever in the gold itself. He explained the gold certificate listings on the Fed balance sheet, not as a claim to gold, but at most a claim to dollars from the Treasury. See the quotes here (and watch the videos at the bottom of the post):
Scott Alvarez: “The Federal Reserve does not own any gold at all… we have not owned gold since 1934, um, so we have not engaged in any gold swap. Before 1934 the Federal Reserve did, we did own gold. We turned that over by law to the Treasury and received in return for that gold certificates.”
Ron Paul: “…You have the securities for essentially all the gold?”
Scott Alvarez: “No. No we have no interest in the gold that is owned by the Treasury. We have simply an accounting document that is called gold certificates that represents the value at a statutory rate that we gave to the Treasury in 1934″
This issue is even more complicated than may appear and after doing some research we seem to have settled some of the quirks in this odd Treasury-Fed scheme. Bare with us when reading through this.
What appears to have happened under the Gold Reserve Act of 1934 is the Treasury seized the Fed’s gold, taking full ownership and claim to its proceeds. The Treasury as an aside transferred a sum of special 1934 series gold certificates to the Fed amounting to the statutory value of gold ($20.67 per ounce) times the quantity of gold transfered from the Fed to the Treasury. The official gold price was later revalued to $35 an ounce, an effective 40.94% devaluation of the currency, and stood at that value until the passing of the Par Value Modification Act of 1972. Under this act, gold was revalued again, this time to $38 an oz, and the Treasury account was credited upwards by $822 million in miscellaneous receipts to reflect the change in the gold price from $35 to $38. The gold was revalued one last time in 1973 to $42.22 and again the Treasury was credited with more addition value to their gold, $1.157 billion to be exact, to account for this. As of today, the Federal Reserve was left with $11.16 billion dollars worth of gold certificates and the Treasury holds 8,133.5 tonnes of gold still valued at $42.22.
So what exactly are the gold certificates the Fed holds? For one, the Fed’s gold certificates are unlike previous gold certificate issues, and are not publicly trade-able. They are also not direct claims to gold, but rather reflect claims only to US issued currency or coin held by the Treasury. In addition the Treasury can demand these certificates back at any time in exchange for cash. The Fed’s gold certificates are an accounted for liability of the Treasury as listed in Note 19. Treasury’s “Other Liabilities”. In addition, if the Treasury is unable to satisfy a demand by the Fed for the funds, the Fed is able to gain access to the gold, since the gold stands as collateral for the gold certificates issued by the Treasury. This fact is taken from this statement in Note 2, from the Treasury’s balance sheet:
“Gold totaling $11.1 billion as of September 30, 2010, and 2009, was pledged as collateral for gold certificates issued and authorized to the FRBs by the Secretary of the Treasury.“
Given that the Fed has an indirect claim to the Treasury’s gold, it is questionable what line of reasoning the Fed’s general counsel was using when stating so broadly that the Fed has “no interest in the gold that is owned by the treasury” though this wording does come from the Gold Reserve Act.
In any case, we can analyze the implications of the basic facts and come to a couple of conclusions:
1) The widespread notion that the Fed owns gold is false. The corollary to this is the mistaken belief that the Fed understates its gold holdings on its balance sheet by only reporting certificates based on the $42.22 statutory gold value. The Fed does not in fact own the US gold stock multiplied by the market price of gold, unless the Treasury defaults and even then its not clear. The Fed does, however, own a claim to currency totaling $11.1 billion and this value has a remote chance of going up significantly if the Treasury revalues its gold, and attempts to monetize it.
2) The fact that the Fed owns no gold, nor claims to any gold, means the fundamental value of the dollar lacks any backing besides dollars themselves, not including Fed building and equipment. Dollars are in essence worth a lot less than many people thought, and the Fed is much more impotent in using the prowess of their assets, and conducting monetary policy in general, than many believed. In all, Alvarez’s clarification strengthens the case for gold’s high dollar value immensely.
*A second analysis article on this topic is upcoming which will delve deeper into the Fed and Treasury’s relationships with regards to gold and gold certificates. Check back at GoldNews.com for this follow-up article to be posted this week*
See the specific exchange between Alvarez and Ron Paul about the Fed’s gold here:
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