U.S. Exchange Stablization Fund to collateralize up to $50 billion of money market mutual funds
Final Update 4: 4.44PM EST
The Treasury issued a statement widely reported:
“For the next year, the U.S. Treasury will insure the holdings of any publicly offered eligible money market mutual fund — both retail and institutional — that pays a fee to participate in the program,” the Treasury said in a statement.
The ESF has been offered as collateral to insure up to $50 billion of money market funds. As ESF funds are needed to pay on this commitment, the Treasury would make announcements. Whether the Treasury will hedge this potential commitment of ESF capital by using its overall balance sheet to offset any future ESF payments is unknown. The regularly issued financial statements from the Treasury will describe the ESF financial condition as well as any ownership of gold. Statements for end of September condition should be available in October.
We will review the statements when issued to understand whether any Treasury assets including gold were used to purchase money market fund assets or other assets including mortgage backed securities.
We reiterate that the report by MoneyMarketing.co.uk that the ESF was being used to purchase U.S. mortgages in exchange for U.S. gold as collateral was inconsistent with the statements made by the Treasury.
Update 3: 3.24PM EST
We continue to monitor statements being made with respect to the Exchange Stabilization Fund providing liquidity to secure money market accounts and purchase U.S. mortgages. We previously reported that some were reporting that the ESF was using the U.S. gold reserve as collateral for these purchases. Our subsequent research revealed that a precedent exists for the ESF to indirectly get involved in the gold market, using ESF assets for gold swap transactions intended to create stability in financial markets. The important fact to keep in mind is that the ESF has no gold, and so the article published by moneymarketing.co.uk was not only factually incorrect, but possibly propaganda, which if reported in the U.S., might be grounds for a criminal offense.
We continue to monitor statements with respect to the actual assets of the ESF and how they will be deployed to stabilize financial markets.
Update 2: 8.24PM EST
Earlier today, we reported that the leading website for money managers in the U.K., MoneyMarketing.co.uk was reporting that the ESF was being used to purchase U.S. mortgages in exchange for U.S. gold as collateral. We have found more to this story.
On June 20th, GATA announced that it had received an answer from the U.S. Treasury Department which admitted that it had at least "contemplated" gold swaps. Since the response was not a specific confirmation that gold swaps have taken place, there may not be anything to the story. But GATA reported a statement found on the Federal Reserve's website, which has been taken down, made during a January 31, 1995 Federal Open Market Committee meeting by J. Virgil Mattingly, general counsel of the Fed and FOMC specifically mentioned gold swaps.
It's pretty clear that these ESF operations are authorized. I don't think there is
a legal problem in terms of the authority. The statute [31 U.S.C. s. 5302] is very
broadly worded in terms of words like 'credit' -- it has covered things like the
gold swaps -- and it confers broad authority.
In the same GATA article, to quote a remark by Alan Greenspan during a 1998 House Banking Committee hearing"
Nor can private counterparties restrict supplies of gold, another commodity whose
derivatives are often traded over-the-counter, where central banks stand ready to
lease gold in increasing quantities should the price rise. [Emphasis Supplied.]
There's a much larger story here that is well documented on the GATA website and the belief that the ESF was used "to set up the swap lines with foreign central banks" and that
The U.S. Mint reclassified approximately 1700 tonnes of gold at West Point, New York to "Custodial Gold Bullion" from "Gold Bullion Reserve."
There is some evidence that suggests that the 1700 tonnes of Gold at West Point was apparently a trade with the Bundesbank of Germany.
And in the same GATA article, Treasury Secretary O'Neil, when asked about gold swaps by the ESF on May 23, 2001 at a House Financial Services Committee hearing, said
Mr. O'NEILL. Well, I will tell you, I would not probably be in a position to answer
any of these questions except for the fact that on Sunday night when I was working
through my briefcase, I found a report that it is my duty to transmit to the Congress
providing the information on the most recent examination of the Exchange
Stabilization Fund. Indeed, this was a fund set up in the Roosevelt Administration in
1934 for the express purpose of protecting the American financial system from the
vagaries of the rest of the world's finance systems. Just as you say, it is empowered to
operate in gold and in currencies, and there is a substantial latitude as to how this
arrangement can work.
So it seems that there are serious questions about the credibility of the ESF and whether it is currently operating in the gold market or not. You can be certain that, as part of this bailout package, if operating in the gold market were to be in the national interest, then it seems that at least one Treasury Secretary thinks that is OK. To what extent and in what manner the U.S. gold might be used in such transactions, is unknown.
Update 1: 5:25PM EST
Bloomberg is reporting that the Exchange Stabilization Fund contains foreign currency reserves. A look at the U.S. Treasury's own website shows the ESF Statement of Financial Position, as of August 31, 2008. Listed as total assets are $9.5 billion of Special Drawing Rights, $16.8 billion of U.S. Government Securities, $14.8 billion of Euros including $6.7 billion which are deposited at institutions, and $8.8 billion of Japanese Yen of which $2.9 billion are deposited at institutions.
The implications are the actual purchasing power used for the mortgages will be a combination of the assets listed above. So the report from MoneyMarketing.co.uk appears to be completely innacurate as the government is not selling its gold reserves. Further, on the Treasury website, it is specifically stated "
The ESF has not been used to manipulate gold prices. In fact, the ESF has not held gold since 1978. It does not engage in any transactions in the market for any metal such as gold, either in spot markets or in any of its various derivative forms.
The Financial Management Service reports that as of August 29, 2008, total gold bullion held is 261,498,899 ounces with a book value of $11,041,058,821. Actual market value is approximately $222 billion at todays spot price.
So would the U.S. Treasury sell gold to purchase assets for market stability? For now, that is not what was announced by the U.S. Treasury.
Special to NowPublic from Bullion-Advisor.com
MoneyMarketing.co.uk is reporting that “President Bush approved the use of existing authorities by Treasury secretary Hank Paulson to make available as necessary the assets of the Exchange Stabilisation Fund for up to $50 billion to buy more illiquid mortgage assets.” The U.S. Treasury has promised “hundreds of billions” to save the U.S. markets using its own gold reserves.
According to GATA the U.S. has 8136 tons of deep storage gold. If that amount is true, then up to $50 billion at current gold market prices is equal to approximately 2900 to 3000 tons.
Also, keep in mind that the U.S. Congress is set to vote on the IMF’s proposal to sell 403 tons of gold to boost its reserves. This amounts to 12% of its gold reserves. The G7 has already approved the sale, but the U.S Congress must also approve. Could this happen shortly?
Short Term Gold Direction
Now, if you are bullish on gold, you believe that the government will simply print the money “out of thin air” to finance the portion necessary of the new $1 trillion in debt we just took on with inflation. In other words, the U.S. Treasury will print and sell treasury bonds and the Federal Reserve will print dollars as a result. The spike we saw in the market yesterday was a reaction to that idea.
If, however, you are bearish on gold, you believe governments and central banks will sell gold to shore up their nation’s financial condition. If the U.S. Treasury were to sell $50 billion worth of gold to purchase other assets, that would amount to upwards of 3000 tons of gold if necessary, which is equal to almost all of the entire gold held in reserve by the IMF, which is the world’s third largest holder of gold according to the World Gold Council.
As an investor, the idea of buying into a gold market with the possibility of heavy central bank selling is not a very attractive option. On the other hand, if demand for gold overruns thousands of tons of selling, then gold can go much higher from here.