Does A Surging Gold Price Mean The Fed Will Be Forced To Sell Treasurys?

As part of GATA's ongoing crusade against the Fed's gold price manipulation efforts, the organization recently succeeded in extracting some novel clues on how and why the Fed views its sworn duty as keeping the price of gold low. While much of the requested documents demanded by GATA in a lawsuit with the Fed have been exempt from disclosure under the law, one that was made public consists of the minutes of a private meeting of the G-10 Gold and Foreign Exchange Committee in April 1997. And while we will leave it up to our readers to parse through the bulk of the comments (attached below), we would like to draw attention to one, attributed to Peter R. Fisher, head of open market operations and foreign exchange trading for the Federal Reserve Bank of New York, or in other words the equivalent of our very own Brian Sack. Fisher's comment relates to what would happen to the Fed's securities portfolio should there be a sudden or gradual revaluation in the price of gold. His conclusion is that in order to keep the Fed's balance sheet stable, an (acknowledged) surge in the price of gold would lead to a forced selling in Treasurys. Of course, that would mean that the Fed would have to actually value gold at its actual market price, instead of that relic price of $42.22 per ounce. Which means that valuing gold at fair market value would result in dumping over $300 billion in Treasurys, something the Fed can not afford to do at a time when it is engaged in purchasing $100+ billion each month.

To wit:

Fisher explained that U.S. gold belongs to the Treasury. However, the Treasury had issued gold certificates to the Reserve Banks, and so gold (by these means) also appears on the Federal Reserve balance sheet. If there were to be a revaluation of gold, the certificates would also be revalued upwards; however [to prevent the Fed's balance sheet from expanding] this would lead to sales of government securities. So the net benefit to Treasury would need to be carefully calculated, since sales of government securities would expand the public portfolio of government securities and hence also expand the Treasury's debt servicing burden.

To an extent we agree with GATA's summary of the implication of this statement: "This seems to be as candid an acknowledgement as any of the U.S. government's profound interest in suppressing the price of gold." Yes and no. While this is in fact indicative of the Fed's desire to keep gold price low, it is the case in a world in which the Fed were to see gold as priced at $1,390/ounce. Not at the fake price of $42.22/ounce (perhaps the Fed can sell us some gold at that price?)

Now keep in mind that the Fed discloses the value of its gold stock as $11.041 billion in each weekly H.4.1. If the Fed were to value gold at FMV, the asset side of the Fed's balance sheet would suddenly balloon by just over $350 billion, as the fair value of the 8,133.5 tonnes of gold allegedly in possession by the US is valued at $361.8 billion. Which of course also means that to account for the surge in paper assets by $350 billion, the Fed would either have to sell a like amount of Treasurys or increase the liabilities side of its balance sheet, by either increasing the Currency in circulation or the Excess bank reserves by a like amount, a result which would increase inflationary expectations by a massive percentage. Both are obviously outcomes that the Fed will fight to the death to avoid.

As for the question of how much of this unauditable gold tonnage is actually there, that's a different matter entirely.

So yes, thank you JP Morgan for continuing your sworn duty of doing all you have to do, to maintain the Fed's 4th mandate of suppressing the price of gold, and preserving the myth that there is no inflation in the US. The people of this truly great and democratic nation applaud your efforts.

Full declassified disclosure released to GATA - link.


GATA Gold 2.20