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Date Posted: 23:15:42 02/06/04 Fri
Author: siempre
Subject: Frank Veneroso

FRANK A. J. VENEROSO
Mr. Veneroso is currently the head of Veneroso Associates. Formerly he was a partner of Omega Advisors, where he was responsible for investment policy formulation. Prior to this, acting through his own firm, Mr. Veneroso has been an economic consultant and investment strategy advisor to governments, international agencies, financial institutions, and corporations around the world. He acted as an economic policy advisor to international agencies and governments in the areas of money and banking, financial instability and crisis, privatization, and the development and globalization of emerging securities markets. His clients have included the World Bank, the International Finance Corporation, and the Organization of American States. He has been an advisor to the governments of Bahrain, Brazil, Chile, Ecuador, Korea, Mexico, Portugal, Thailand, Venezuela, and the United Arab Emirates Mr. Veneroso graduated cum laude from Harvard University and has authored several articles on subjects in international finance.


The Gold Conspiracy Question GATA Provokes Interesting Responses From the Fed and Treasury
The Senate and Congress Question the Fed and Treasury About Gold Price Manipulation The US Issues A Blanket Denial
The Fed's Denial Provides Grounds for Suspecting Official Intervention Large Undisclosed Official Supplies Reversed the Fall 1999 Gold Price Rally

If Such Supplies Are From Scattered Central Banks, the Gold Price Will Explode Sooner
If Such Supplies Are From the US Authorities, It Will Explode Later But More Violently

At the beginning of this year we decided to discuss the issue of whether the US Federal Reserve or the Treasury was intervening in the gold market. For us, the question is posed by
a simple process of inference.
All of the price and income determinants of gold demand suggest a strong recovery in demand should have occurred since mid 1998. World Gold Council demand surveys provide
confirmation. Scrap supply from distress selling in the Far East has stopped. Mine supply has been flat. With such a dramatic improvement in the market's overall supply/demand
framework, the price of gold should have recovered like oil, copper and most other commodity prices. It has not. One must posit a very large undisclosed supply of gold to explain
current depressed prices.
In the past, we could attribute such a supply to short selling by funds, bullion banks and producers. Because of the Washington agreement reached by the fifteen European central
banks in September 1999 and the subsequent upside explosion in the gold price, these former private sector short sellers no longer regard selling short gold as a one way bet;
their risk perceptions have changed. There is a great deal of evidence that producers have been reducing hedge positions. There is evidence as well that funds and bullion banks
have moved to reduce short positions. Therefore, former private sector short sellers in aggregate have been buyers, not sellers. This implies the existence of large official
supplies. The Netherlands has sold 64 tonnes since late September. The UK has sold 50 tonnes. Some additional small official sales have been reported. We hear rumors that Brazil
may have sold all of its gold in recent months (perhaps 200 tonnes). Gold Fields Mineral Services has reported that two large holders who presumably do not report to the IMF were
significant sellers in the fourth quarter. These quantities taken together may or may not explain the implied large undisclosed selling of recent months. The Washington Agreement
of September 1999 makes it unlikely that there were additional substantial official supplies of European origin.

There are only 6000 tonnes of official gold held by countries outside Europe and North America that are reported to the IMF. Much of it has been lent out. Most of these countries
are not likely candidates for large official gold sales. Furthermore, the expressed intention of the Washington Accord was to improve gold market sentiment, reduce gold supplies,
and thereby raise the gold price. Why would other central banks, who surely must be aware of this, become massive sellers of gold at current depressed price levels?
We believe there are perhaps 2000 to 3000 tonnes of official gold held by Saudi Arabia, the Vatican, Brunei, China, and others that have not been disclosed to the IMF, and which
could be under liquidation. The current high oil price removes any direct financial requirement for oil exporting nations like Saudi Arabia or Brunei to sell gold. These official
bodies must also know the intentions of the fifteen European central banks regarding the gold market. A sudden avalanche of selling by these parties at current depressed prices
amid rising global demand and commodity prices makes little sense.
It is possible that numerous official holders have sold large quantities of gold over the last four months and that very little of such selling has been disclosed. But it is
equally possible they have not. Given this, by a process of elimination one must consider it possible that the US is the undisclosed seller as it may be the only official body
with the resources to sustain the supplies implied by the prevailing supply/demand framework. This possibility is strengthened by the US open policy in recent years of encouraging
a lower gold price. When most of the European signatories to the Washington accord were planning last summer to act to improve gold market sentiment and restrict gold supply, the
US Treasury was aggressively pushing for IMF gold sales, knowing full well that its words and actions were depressing market sentiment and the gold price. Clearly, the objectives
of the US Treasury were very different from those of the Europeans who must have made their views and objectives known to the US. Lastly, there are persistent reports that Goldman
Sachs has been the featured seller in the gold market on price rallies. In the past, Goldman Sachs has not been the lead dealer for official sales, reducing the odds that the
large undisclosed selling of recent months has been from one or more central banks outside Europe and North America. The dominant role of a US dealer with close connections to the
current administration increases the possibility of the US as the source of undisclosed official selling in the gold market. Because of the obvious logic of the above argument and because more and more market participants have been discussing possible US manipulation of the gold market, we decided to
consider this issue in a straight forward fashion as of the beginning of this year. In the past, we argued against such intervention on the grounds that it made little sense for
the US Treasury or Federal Reserve to intervene in the gold market. In effect, we lacked a compelling motive. We suggested that, if the gold market were under manipulation by the
US authorities, it would have to be part of a broader policy of management of expectations in more important markets. For that reason, we distributed to clients an analysis of the
public record on possible Fed or Treasury intervention in the stock market. We concluded that the public record suggested such intervention was possible, though it did not provide
strong evidence of such intervention.
Since our last Gold Watch on this subject, there have been several inquiries along these lines made by the US senators, Senator Dodd and Senator Lieberman of Connecticut. It has
also come to light that Representative Canady posed similar questions last fall. Unlike the questions posed by representative Ron Paul on possible Fed or Treasury intervention in
the stock market, where the Treasury failed to respond for more than a year, these inquiries received prompt responses. In the case of Canady's inquiry, across the board denials
were provided by both the Fed and Treasury. Only the Treasury responded to Dodd. So far, only the Fed has responded to Lieberman. Though the individual responses ignore or avoid
some aspects of these questions, taken together they look like an across the board blanket denial of any Fed or Treasury intervention in all markets: stocks, bonds, commodities or gold.

Does this finally settle the issue? At first, we thought it might. However, on review we have concluded that it does not for the following reasons.

The questions posed by Senators Dodd and Lieberman and Representative Canady were provided by the Gold Anti Trust Action Committee (GATA). We understand that several other House
and Senate members have taken an interest in this issue. According to GATA, Texas senator Phil Gramm, Chairman of the Senate Banking Committee, has prepared similar questions for
the Fed and the Treasury. Also, Congressman Jim Ryun from Kansas has contacted GATA for information in order to prepare similar questions in response to demand from constituents
for answers. This surprises us. The United States is a responsive representative democracy. GATA has been very active in the pursuit of its objectives. Nonetheless, it strikes us
as unusual that so many House and Senate members would have responded to GATA's efforts with repeated questions to the Fed and Treasury. First, posing such questions that have
already been answered in response to an earlier inquiry implies that the Senators and Representatives involved believe that it is possible the prior Fed or Treasury responses have
not been completely straightforward. Second, their willingness to pose such questions suggests that there is considerable interest among their constituents on this issue.
Suspicions apparently extend beyond those of GATA. Lastly, it is possible that the government has intervened in markets in the past at times of crises and that it informed key
members of the legislature who were bound to secrecy. Therefore, such interventions may seem more plausible to members of the House and Senate than to the general public.
The Treasury and Fed have provided blanket denials of intervention in the stock market. Their blanket denials encompass 1987. It is well known that many market participants
claim to know of such an intervention at the time of the stock market crash of in October 1987. For such market participants, the blanket nature of these denials places these
overall denials of the Fed and Treasury in doubt.
Lastly, Chairman Greenspan of the Fed responded directly to Senator Lieberman in a signed letter which is available on the gata.org web site. In this letter he responds to a
question about a statement he made in congressional testimony to the effect that central banks stand ready to lease gold in increasing quantities should the gold price rise.
Greenspan argued that his testimony was in the context of hearings on the regulation of over-the-counter derivatives and has been taken out of context. We have made
this very point in past reports in which we concluded that Fed or Treasury involvement in the gold market was not likely. However, we find Greenspan's explanation of his remarks
open to serious question for the following reasons.



In this most recent response on the issue Greenspan states that he presumed that everyone would know that his statement was not referring to the Federal Reserve since (in the
words of Greenspan) the Fed's own public balance sheets indicate no ownership of gold. I did not think it was necessary to indicate that the Federal Reserve was not part of
the group of central banks who do lease gold since the Federal Reserve owns no gold. In some countries such as the UK the Treasury legally owns official gold. However, it is
common parlance that it is also the central bank's gold since it is classified as a reserve asset. In addition, such common parlance has considerable justification. If one looks
at the Fed's own balance sheet, there is a line item on the asset side labeled gold stock. Its total is $11 billion. Valued at its official value of $42 an
ounce, it appears to encompass the entire US official gold reserve. It has been explained to us by James Turk that this gold stock refers to gold certificates held by the Fed,
which are claims on the Treasury's bullion holdings. However, this would not be apparent to most observers from a reading of the Fed's balance sheet and its
accompanying notes. Chairman Greenspan is surely aware of these points.
The following statement comes from the legislation that created the Fed in 1913. It appears to involve the Fed directly in the gold market and authorized the lending of gold. We
understand that, in the opinion of GATA's lawyers, Berger and Montague, this clause is still applicable, despite changes in monetary regimes since 1913.
"Every Federal reserve bank shall have power to deal in gold coin and bullion at home and abroad, to make loans thereon, exchange Federal Reserve notes for gold, gold coin, or gold
certificates, and to contact for loans of gold coin or bullion giving therefor, when necessary, acceptable security, including the hypothecation of United States bonds or other
securities which Federal reserve banks are authorized to hold."
We presume that Chairman Greenspan is aware of this as well. We conclude that Chairman Greenspan's explanation of his statement that "central banks stand ready to lease gold
in increasing quantities should the gold price rise is close to a ruse.


There is no evidence we know of which suggests that central banks stand ready to lease gold in increasing quantities should the gold price rise. Central banks who admit to
leasing gold indicate they do so to earn interest on an otherwise barren asset. Earning interest is their avowed motivation. The lease rate on gold has always fallen on gold price
rallies. Therefore, the propensity of central banks to lease gold should fall, not rise, on such rallies. The Chairman says that he was not referring to the Fed but only to
more than one central bank other than the Fed that stand ready to lease gold. Since September of 1999, this statement no longer applies to the fifteen European
signatories to the Washington Accord. How does Greenspan know that other such central banks stand ready to lease gold in increasing quantities should the price rise.


In his congressional testimony regarding possible CFTC regulation of OTC derivatives markets, Greenspan was apparently referring to the possible manipulation of commodity
markets by private counter parties who might restrict supplies Greenspan appeared to be arguing that there was no need to extend CFTC powers to the OTC
gold market since a Hunt-type manipulation of the gold market could be prevented by the authorities through the leasing of gold. However, even if central banks stand ready to
lease gold in increasing quantities should the price rise, this will not in and of itself curb any rise in the gold price due to a restriction of supplies by private counter
parties. Though central banks might be willing to lease gold on a price rise, there must be willing parties to borrow that gold if the increased propensity to lease of these
central banks it is to matter in any way to the gold market.
The historical record suggests that, when the gold price rises, private market participants in aggregate do not add to short positions. Producers sometimes do add to short
positions on a scale up, but speculators almost always cover short positions and go long. The fact that lease rates fall on price rallies suggests that private market
participants, taken in the aggregate, reduce rather than increase short positions when the gold price rises. Therefore, the increased propensity of "more than one"
central bank to lease gold in increasing quantities would not tend to curb a Hunt-like manipulation of the gold market. Only if another central bank was willing to borrow such
gold and sell it into the market would increased lending frustrate a Hunt-type manipulation.
It seems to us that there is a hidden implication in Greenspan's remarks that some central banks stand ready to borrow gold leased by other central banks should the gold price
rise. Greenspan is arguing that CFTC regulation of the OTC gold market is not necessary because central banks can handle possible manipulations. How would Greenspan know about
such official short selling of increased gold available for lease? Is there an implication here that the Fed knows of such contingency measures to preserve gold price stability
that the market is unaware of? Is there an implication that the US need not extend CFTC supervision to the OTC gold market because other US government bodies (the Fed, the
Treasury?) stand willing to sell leased official gold should the gold price rise?





The debate about whether the Fed is part of a manipulation of the gold market has now blown wide open. Despite Fed and Treasury denials, we remain open to the possibility of such
intervention for the reasons we have set forth above.
We are more certain than ever that our supply/demand framework for the gold market is correct. That means that there have been large undisclosed official sales depressing the gold
price. If these sales have been by official bodies outside Europe and North America, such as Saudi Arabia, the Vatican etc., the current large gold market deficit and the new
propensity to cover gold shorts by private market participants will exhaust these supplies sooner rather than later and the gold price will explode.
If these supplies involve coordinated intervention by bullion banks with official support, possibly from the US, the price will be contained for a longer period of time. If the US
Fed or Treasury is manipulating the gold price, our supply/demand analysis suggests they will eventually fail and in a fairly spectacular fashion. We could conceive of no outcome
that could be more bullish for gold. If the Fed or Treasury thought gold was so important as to manipulate its price, the disclosure of its manipulation would lend greater luster
to gold. When the manipulation was eventually overwhelmed by market forces, the failure of the clandestine official effort would lend greater luster to gold. If this all occurred
amid a bursting of the US stock market bubble and the long and deep decline of the dollar that inevitably must follow in the wake of a record US current account deficit, yet
greater luster would be restored to gold. Under such circumstances, investment demand for gold, which we have always disparaged, would probably soar. It might well eclipse the
commodity case for gold that we have always made - which will prevail in the end in any case.

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