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11p ET Sunday, August 12, 2001

Dear Friend of GATA and Gold:

With his latest essay, "The Mystery of the Disappearing
SDR Certificates," our friend James Turk has done it
again: documented how the U.S. government's suppression
of the price of gold may be working.

GATA supporters in the United States should print this
essay and send it to their congressmen with a request
that the essay be sent to the Federal Reserve and
Treasury Department for comment on whether it is
inaccurate in any substantial way.

Turk's essay refers to a chart that I'm unable to
reproduce here. It should be posted shortly, with the
entire essay, at

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

* * *

The Mystery of the Disappearing SDR Certificates

By James Turk
Copyright 2001, The Freemarket Gold & Money Report

Here's a mystery for you. It ranks high with any of the
great thrillers solved by Sherlock Holmes, but this one
is not fiction.

I have been arguing that the US Treasury and possibly
the IMF have been selling gold, and that their actions
have depressed the gold price. But if I am right, then
why has the reported weight of the US Gold Reserve and
the gold stock of the IMF remained unchanged?

The easiest answer to this question is also the most
unlikely. This low-probability answer is that the US
Gold Reserve and the gold stock of the IMF are not
being accurately reported.

I dismiss this answer, almost completely but maybe not
entirely because one never knows what could be
happening. A deliberately reported inaccurate weight of
gold would mean fraud, and I don't see that deception
to be a highly probable outcome. No, I think there has
to be another answer.

I touched upon the possible solution to this mystery
earlier this year. I wrote (Letter No. 283, "Behind
Closed Doors") that the portion of the US Gold Reserve
stored at the depository in West Point, New York had
been swapped with gold owned by the Bundesbank, and
that the gold in the German central bank had been sold.
So far, nothing I have seen refutes this contention,
and correspondence from the Bundesbank has wrapped much
of its gold policy in a cloak of confidentiality,
adding credence to my conclusion. After all, if my
supposition weren't true, why not just disclose the
facts to convincingly refute it?

Be that as it may, there were some loose ends that in
my mind needed to be tidied up in order to add more
substance to my contention that much of the US Gold
Reserve was swapped and then sold. And first among
those loose ends was the accounting. How were all of
these gold transactions being accounted for? How could
all of this gold be put into play even while the
reported weight of the US Gold Reserve and the gold
stock of the IMF remained unchanged? And perhaps most
importantly, why didn't these transactions result in
any apparent change on the balance sheet of the main
perpetrators of this scheme, the Federal Reserve and
the Exchange Stabilization Fund? There has to be some
kind of accounting trail, doesn't there?

I've thought long and hard about these questions, but
have been unable to answer them to my satisfaction --
until now. And in this regard, I would like to thank
David Walker, a tireless researcher who has an uncanny
ability to read between the lines of tedious and dull
government reports to get at the truth. Dave's terrific
work provided me with the motivation to continue
researching an area that until recently had been
largely unfruitful for me. And what is that area? A
monetary instrument emitted by the International
Monetary Fund called the SDR, an acronym for Special
Drawing Rights, a.k.a. "paper gold."

My intuitive sense for some time had been that SDRs
were the key necessary to unlock the door. By
understanding the SDR, I expected that one could
understand what was happening to the US Gold Reserve as
well as put together a consistent accounting and the
legal framework for the gold transactions that I
contend have been taking place. But even though I
thought SDRs would provide the much sought after answer
I was seeking, I was having trouble with a few things,
mainly related to the accounting.

For example, SDRs are so-called "paper gold," so this
financial asset has to have a corresponding liability
just like any other "paper" money, right? But I
couldn't find who or what is actually liable for the

After digging away in the IMF archives, I found the
following in an IMF accounting manual called the Manual
on Monetary and Financial Statistics, in a section
entitled "Definition of Financial Assets:

"Monetary gold and SDRs issued by the IMF are financial
assets for which there are no corresponding financial

How about that? No wonder I couldn't reconcile the
accounting. Here's a purely financial asset with no
corresponding liability!

SDRs issued by the IMF are accounted in the same way
that the IMF accounts for its stock of gold. I thought
that only tangible assets like gold, houses and land
had no liabilities. I never dreamed that a financial
asset would not have a corresponding liability, but
after this realization, one thing led to another and
everything slowly but surely started falling into

In "Behind Closed Doors" I included the following quote
from the transcript of the January 31st, 1995 FOMC

* * *

MR. TRUMAN. The legislation governing the objectives of
the ESF was changed, I think for the most part in the
mid- to late-1970s. The changes included the language
that the government of the United States and the
International Monetary Fund have the obligation to
promote orderly exchange rate arrangements leading to a
stable system of exchange rates.

* * *

Since first reading this candid comment I have always
been struck by it. Truman is relying upon this 1970's
legislation to provide the legal justification to use
the ESF to bail out Mexico. It therefore seemed clear
to me that if I could figure out what was implemented
in the 1970's, I could then come to more precisely
understand how the US Gold Reserve was being put into

I had been unsuccessful, however, in trying to figure
out what was the legislation to which Truman was
referring. Well, I now think that he was referring at
least in part to what is called the Second Amendment of
the IMF.

By way of background, when the gold crisis in the 1960s
was in full swing, the original IMF articles were
amended. This First Amendment to the IMF created SDRs.
Then here's what the Second Amendment did.

* * *

What changed under the Second Amendment to the Articles
of Agreement of the IMF?

The Second Amendment to the Articles of Agreement of
the IMF, which came into effect in April 1978,
eliminated the use of gold as the common denominator of
the par value system and as the basis of the value of
the SDR. The Amendment also abolished the official
price of gold and abrogated the obligatory uses of gold
in transactions between the IMF and its members.... Under
the Amendment, members undertook to collaborate with
the IMF and other members with respect to reserve
assets to promote better international surveillance of
international liquidity.

* * *

I draw your attention to the last sentence. I think
this statement explains what Ted Truman was referring
to. The term "international liquidity" is a euphemism I
think that gives a carte blanche to do whatever the
various IMF members want to do, using assets that are
at hand or whatever assets that they create out of thin
air, to intervene and manipulate any market anyway they
want under the guise of "international liquidity"
which really means to let the banks create credit out
of thin air for no other purpose but to keep the
present system afloat so they can preserve their
position of privilege and keep lining their pockets.

The following quote is from the "User's Guide to the
SDR" published by the IMF.

* * *

3. Improvements in the SDR after the Second Amendment:

One of the major objectives of the Second Amendment of
the Fund's Articles of Agreement, which became
effective on April 1, 1978, is to make the SDR the
principal reserve asset of the international monetary
system. To this end, the Fund's Executive Board has
taken a number of decisions to improve the yield on the
SDR and its liquidity and usability. At the same time,
certain obligations arising from participation have
been eliminated.

* * *

"Improvements" to you and me may sound innocuous, but
in reality these 'improvements' have only one objective
- to keep the present system afloat by providing more
power to governments working hand-in-hand with the
banking cartel. So far I'm not sure of all the ways the
SDR became more usable, nor have I yet discovered all
the obligations that were eliminated when the Second
Amendment "improved" the SDR. But I have learned enough
about the SDR to conclude why the accounting of the US
Gold Reserve does not appear to have changed. This
mystery can be solved by first solving a second
mystery, the case of the disappearing SDR Certificates.

To begin, it is necessary to provide some background
information gleaned from more hours of studying arcane
IMF accounting than I care to admit, but I'll keep it
simple. And the way to do that is to show how `real
gold' and Gold Certificates are accounted, because I
have learned that `paper gold' and SDR Certificates are
accounted essentially the same way.

The US Gold Reserve does double duty. It sits in the
vaults at Fort Knox and the other depositories, but the
US Treasury has issued Gold Certificates against it.
The Federal Reserve owns these Gold Certificates,
giving the Fed a claim to the 261.6 million ounces in
the US Gold Reserve. Simple enough, and the same
transaction is used for `paper gold' the SDR's
just one small difference. The US Treasury has
transferred its SDR's to the ESF, so the ESF and not
the US Treasury issued the SDR Certificates now owned
by the Federal Reserve.

Importantly, these SDR Certificates are being accounted
for much the same way as the Gold Certificates. Both
are carried at book value, which is much less than
their market value. The Gold Certificates are carried
on the Federal Reserve's books at $11,046 million,
which doesn't sound like much. However, when you
consider that these Gold Certificates are being valued
at only $42.22 per ounce, this asset represents the
entire 261.6 million ounces in the US Gold Reserve. And
the SDR Certificates are being valued at well, here
is where it starts to get interesting. And here is
where the mystery of the disappearing SDR Certificates
comes into play. Look at the decline in the SDR
Certificates in the accompanying table.


The above table presents the SDR assets and liabilities
of the ESF and the Fed. Though recent figures for the
ESF are not available, as of August 9th the Fed still
owns only 2,200 million of SDR Certificates, so
presumably the SDR entries on the ESF balance sheet
have not changed much since December 2000. To
understand why the SDR Certificates are disappearing as
well as where they are going, more background
information is necessary.

The US, like each IMF Member, owns SDRs but is also
responsible for the value of the SDR. Note 4 of the
ESF's financial statement for 1999 explains it thus:
"Its [the SDR's] value as a reserve asset derives,
essentially, from the commitments of participants to
hold and accept SDR's and to honor various obligations
connected with its proper functioning as a reserve

As of December 1998, the ESF owned 10,603 million
SDR's, but it had a liability for 6,899 million SDR's.
What does this liability represent? Here's what
Schedule B of the Articles of Agreement of the IMF
says: "0.888671 gram of fine gold shall be equivalent
to one special drawing right." That means 35 SDRs equal
one ounce of gold. So the US has the potential
obligation as of December 2000 -- if required to make
good on SDRs issued -- to pay to the IMF or its members
182.4 million ounces of gold, some 69.7 percent of the
US Gold Reserve.

That huge liability is pretty scary, but it is only a
potential liability. Who knows whether the US will ever
be required to make good on it, or if it does, whether
the US will default just like it defaulted in 1933 on
its obligation to pay US government bonds in gold and
in 1971 on its obligation to redeem 35 dollars for one
ounce of gold. Those are problems to worry about in the
future. Of more immediate concern is the decline in the
SDR Certificates. What is that all about?

To answer this question and to solve this mystery of
the disappearing SDR Certificates, we have to once
again go back to basics.

Why are the SDR Certificates declining?

The basic answer is quite simple. The SDR Certificates
MUST BE reduced if the ESF intends to use its SDRs for
any purpose, such as market intervention or swaps. In
other words, the SDR Certificates are a claim against
the SDRs, so the SDR Certificate must be cancelled to
remove any claims on the SDR before the SDR can be used
by the ESF. But the amount of SDR's owned by the ESF
hasn't changed except briefly in early 1999, so it
seems that the SDRs are not being used for any purpose.

So what I think has happened is that the SDR
Certificates are themselves being used by the ESF.
Here's what the IMF says about the use of SDRs in

"In accordance with Article XIX, Section 2(c), the Fund
prescribes that ... a participant, by agreement with
another participant, may engage in an operation by
which (a) one of the parties transfers [i.e., swaps] to
the other party SDRs in exchange for an equivalent
amount of currency or another monetary asset, other
than gold."

Thus, SDRs cannot be swapped for gold, but there is no
IMF regulation that prohibits the swapping of SDR
Certificates for gold.

So let's take this observation to its logical
conclusion, namely, that the ESF and/or the Federal
Reserve has been swapping SDR Certificates issued by
the ESF for gold owned by the Bundesbank, and
presumably other central banks as well because we noted
above that the Second Amendment states that "members
undertook to collaborate with the IMF and other
members" for the sake of international liquidity. So
presumably, all IMF members are committed to undertake
any scheme that the US government may hatch.

This interpretation may also explain the strange
response to Alan Greenspan by the Fed's general
counsel, Virgil Mattingly, who has "no clear
recollection of exactly" what he said during the
January 31, 1995, FOMC meeting, even though it seems
most likely that the transcript accurately records him
as saying "gold swaps."

In his June 8, 2001, note to Greenspan, Mattingly
states: "I can confirm that I have no knowledge of any
'gold swaps' by either the Federal Reserve or the ESF."

Is Mattingly being truthful? Yes, I think so, at least
in regard to the precise choice of terms used in his

Remember President Clinton's exegesis on the definition
of the word "is"? Lawyer Mattingly, I think, is playing
the same game.

By this line of thinking, neither the Federal Reserve
nor the ESF do "gold swaps." Instead, these
transactions are probably called "SDR Certificate
Swaps" or some other similar term, although the FOMC
participants may use the unofficial term "gold swaps"
as a shorthand moniker that is not only easier to say
than the official name of the transaction but also has
the added advantage of clearly communicating the net
result of the transaction.

There is another important piece of corroborating
evidence that SDR Certificates are being used by the
ESF to hide its gold transactions. When several months
ago I first read the audited financial statement of the
ESF, I was struck by a peculiar phrase in footnote No.
4, which in addition to considerable explanatory text
also provided a table of SDR purchases and sales during
the year. The text stated that these purchases and
sales were "equivalent of SDRs." Therefore, I concluded
that if they were "equivalent of SDRs," SDRs were not
actually being used in the transaction.

But, I wondered, if they weren't SDRs, then what were
they? We don't know for sure what they are, but they
are probably SDR Certificate transactions -- not SDRs,
but only their "equivalent."

Let's put the size of these transactions into
perspective. As of December 2000, the ESF owned 10,539
million SDRs, against which it has issued 2,200 million
SDR Certificates. Therefore, 8,338 million SDRs are
potentially "in play," but we can refine this number
given that it is the SDR Certificates and not the SDRs
that are important.

The ESF by law cannot issue more SDR Certificates than
it has SDRs. The largest amount of SDR Certificates
outstanding was 10,168 million in December 1995, a
significant date, because I have contended all along
that government actions that have depressed the gold
price began in 1996, which is the same year that the
SDR Certificates began to decline. From this peak to
the present, the SDR Certificates have been reduced by
7,968 million.

Given that there are 35 SDRs per ounce of gold, this
reduction in the SDR Certificate account equates to
227.7 million ounces, or 87 percent of the US Gold
Reserve. Does this mean that 87 percent of the US Gold
Reserve has already been swapped?

I don't have the answer to that question, but I would
like to make four important observations that do in
fact suggest that substantially all of the US Gold
Reserve has been put into play.

First, note on the accompanying table the dates when
the SDR Certificates began to decline rapidly. From
10,168 million in December 1995, the SDR Certificate
account declined to 8,200 million by June 1999, or 19
percent over 3 1/2 years. Now look at the decline
beginning in the third quarter of 1999, which
corresponds with the Washington Agreement signed in
September of that year. In only 18 months the SDR
Certificate account declined by 73 percent.

Was there a panic to get gold into the market after the
Washington Agreement to keep the gold price from
rising? This evidence sure does support that

Second, readers will recall how the US Treasury changed
in September 2000 the classification of that portion of
the US Gold Reserve in West Point to "Custodial Gold."
It is interesting and probably meaningful to note that
this change occurred in the fiscal year ending
September 30 in which there was a substantial decline
in the SDR Certificates.

In "Behind Closed Doors" I speculated that the reason
for this reclassification was that the Mint's
accountants or its new director realized that it was
misleading to continue calling this swapped metal as
"Gold Bullion Reserve." This logic may also explain why
more recently, the entire US Gold Reserve was
reclassified as "Deep Storage Gold."

If 87 percent of the US Gold Reserve has indeed been
swapped, it may have been too obvious an admission by
the US Treasury to reclassify nearly the entire US Gold
Reserve as "Custodial Gold." Therefore, to give some
semblance of proper accounting while not totally
divulging the truth, the Treasury came up with the
half-baked term "Deep Storage Gold." Further, it was my
thinking that the Treasury, taking a lesson from
lawyers Clinton and Mattingly, probably defined this
term in some obscure Treasury accounting manual.

What was a speculation on my part is now supported by a
letter dated August 7, 2001, to Richard May from John
P. Mitchell, Deputy Director of the US Mint. Mitchell

"The gold in West Point was not reclassified -- it was
renamed to better conform to our audited financial
statements." Despite providing five pages of supporting
material with his letter, Mitchell does not explain how
this "renaming" enables the Treasury to "better
conform" to its "audited financial statements." The
logical conclusion is that this "better conformation"
arises because the strict application of prudent
accounting principles no longer allows the Treasury to
use the term "US Gold Reserves" because more than half
- and possibly 87 percent of it - has been swapped.
Given that the Treasury does not want to use the more
accurate but alarming term "Custodial Gold," the US Gold
Reserve has therefore instead become "Deep Storage Gold,"
allowing the Treasury to remain within the letter if not
the spirit of the principle of full disclosure.

The third observation takes the above changes and
explains them in weights of gold. The 6,000 million
drop in SDR Certificates from June 1999 to December
2000 represents 171.4 million ounces, or 28.6 million
ounces (888.7 tonnes) per quarter. That's a supply of
about 3,500 tonnes per year, which, added to 2,500
tonnes of new mine production, implies an annual demand
of 6,000 tonnes for the period after the Washington
Agreement. Is this number reasonable?

In my opinion it is. Noted gold analyst Frank Veneroso
contends that annual gold demand has been running about
5,000 tonnes, but this number reflects normal market
conditions. After the Washington Agreement and the
price spike, the market was anything but normal. Even
though fabrication demand fell during that period,
investment and monetary demand for gold soared. So it
is not unreasonable to expect that more than 1,000
tonnes of newly supplied gold from government
dishoarding was needed in the months after the
Washington Agreement to turn the price back from the
+$320 level reached at that time.

The fourth and final observation relates to a point I
made in the last newsletter. I noted how earmarked gold
has been shipped from the Federal Reserve Bank of New
York at a rate of at least 40 tonnes per month
beginning in September 2000, while also stating this
new "dishoarding from the New York Fed smacks of
desperation." The above table confirms this conclusion.

The SDR Certificate account has not changed since the
fourth quarter of 2000. With only 2,200 million
remaining, the SDR Certificate account, while not
depleted, is near rock bottom and one must ask how much
more gold the US government is willing to throw at the
market. I don't think the answer to that question is
"all of it," so essentially there is no more US gold
available for swapping. Consequently, with these SDR
Certificate swaps eliminated as a source of supply,
another source of gold had to be located to fill the
gap between supply and demand.

In the last newsletter I suggested that the IMF is this
new source. That's just a supposition on my part, but
it seems logical that IMF gold is being shipped out of
the New York Fed. The quantities being shipped are so
large, the gold must be coming from a large hoard, and
the IMF has, on paper at least, one of the world's
largest. But regardless of whose it is, this gold is
being shipped at a rate greater than gold is being
mined each month in South Africa, the world's largest

That volume of shipments smacks of desperation to get
gold into the market, and the reason is clear. Because
the SDR Certificate swaps have ended, a new source of
gold supply is needed to keep the gold price from
exploding upward.

In conclusion, it is becoming very obvious that the US
government has put itself in an incredible pickle. But
we've seen this happen before.

In the 1960s the US government dishoarded more than
9,000 tonnes of gold rather than admit that the dollar
had been debased and was no longer worth only $35 per
ounce. Now it appears that perhaps as much as 7,000
tonnes (227.7 million ounces) have been swapped for
essentially the same purpose -- to intervene in the
market to fight the truth, rather than admit that the
dollar has again become very debased relative to gold.