The Fed and gold…

Bill
I heard an astounding comment by former Fed Governor Lyle Gramley on BNN

Listen to this panel discussion, and then focus on the Gramley comments around Minute 12...

Talking about the FED Balance sheet, he cited gold...

referring to the FED owning "Gold Certificates" that are valued at $42.22 an ounce...

and marking to market would improve the Fed balance sheet.

The word "certificates" jumped out at my antennae...

Is the US Gold Reserve owned by the US Treasury or The Fed ?

When did it become "certificates" ?

Many important insights during the 24 minute interview here:

Trading Day : December 8, 2008 : Special: Part One [12-08-08 2:30PM]

Making sense of the financial crisis, the possible cures, and the future of global business. Special guest host Niall Ferguson, author and professor, Harvard University, joins Marty Cej and Frances Horodelski. BNN interviews Lyle Gramley, former Fed Governor and current senior advisor, Stanford Group, and John Taylor, CEO, and founder, International Foreign Exchange Concepts Inc.

http://watch.bnn.ca/trading-day/december-2008/trading-day-december-8-2008/#clip119798

http://watch.bnn.ca/special-presentations/trading-day-special-coverage-december-8-2008/#clip119798

***

GATA’s Chris Powell…

Yes, the Fed's gold certificates are claims on the Treasury's gold. See Page 322 of the Fed's 2006 annual report here:

http://www.federalreserve.gov/BoardDocs/RptCongress/annual06/pdf/ar06.pdf

As I read it, the certificates are collateral for dollars the Fed credits to the Treasury's account, and the gold is a sort of backing for the dollar.

The relevant section is below.

* * *

(A) Gold and Special Drawing Rights Certificates

The Secretary of the U.S. Treasury is authorized to issue gold and special drawing rights ("SDR") certificates to the Reserve Banks.

Payment for the gold certificates by the Reserve Banks is made by crediting equivalent amounts in dollars into the account established for the U.S. Treasury. The gold certificates held by the Reserve Banks are required to be backed by the gold of the U.S. Treasury. The U.S. Treasury may reacquire the gold certificates at any time and the Reserve Banks must deliver them to the U.S. Treasury.

At such time, the U.S. Treasury’s account is charged, and the Reserve Banks¢ gold certificate accounts are reduced. The value of gold for purposes of backing the gold certificates is set by law at $42 2/9 a fine troy ounce.

The Board of Governors allocates the gold certificates among Reserve Banks once a year based on the average Federal Reserve notes outstanding in each Reserve Bank.

SDR certificates are issued by the International Monetary Fund ("Fund") to its members in proportion to each nember’s quota in the Fund at the time of issuance. SDR certificates serve as a supplement to international monetary reserves and may be transferred from one national monetary authority to another. Under the law providing for United States participation in the SDR system, the Secretary of the U.S. Treasury is authorized to issue SDR certificates, somewhat like gold certificates, to the Reserve Banks. When SDR certificates are issued to the Reserve Banks, equivalent amounts in dollars are credited to the account established for the U.S. Treasury, and the Reserve Banks SDR certificate accounts are increased.

The Reserve Banks are required to purchase SDR certificates, at the direction of the U.S. Treasury, for the purpose of financing SDR acquisitions or for financing exchange stabilization operations. At the time SDR transactions occur, the Board of Governors allocates SDR certificate transactions among Reserve Banks based upon each Reserve Bank¢s Federal Reserve notes outstanding at the end of the preceding year. There were no SDR transactions in 2006 or 2005.

***

The certificates are notes redeemable in gold. In other words, the Federal Reserve has a claim to the 261mm oz supposedly stored in the US gold reserve.

The interesting point is that both the Treasury and the Fed talk (when they occasionally talk about gold) as if this 261mm oz was their asset. But this is just another example of the leverage in the system. Even what little gold they own (supposing all of it is still there in Ft Knox) is leveraged in the sense that both Treasury and the Fed consider this same hoard of gold to be their asset.

***