Koos Jansen
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Koos Jansen
Posted on 10 Jan 2015 by

We Can’t Pretend Forever Gold Is Worth $42.22/Oz

The lawful owner of the 8,134 tonnes of official gold holdings of the United States is the US Treasury. The Federal Reserve handed over the official gold reserves to the Treasury in 1934 and in return received gold certificates – which, by the way, are not redeemable for gold, only for dollars, but that’s not the point now. The point is these gold certificates are still valued on the Fed’s balance sheet at $42.22 an ounce.

The free market price of gold is currently about $1,200. The reason the US capped the value of gold on their books at $42.22 in the seventies is because they wanted to phase out gold from the international monetary system to increase the power of King Dollar; denying the true value of the yellow metal supported this ambition. And so the Fed pretends until this day gold is worth $42.22, all in an effort to make us believe in the strength of the dollar. However, the US can’t pretend forever the price of gold is $42.22.

Pompidou 4

George Pompidou to Henry Kissinger, May 18, 1973:

I would therefore like to discuss the monetary question and also the question of gold—not the role of gold because we could debate that in vain and we know that we are not in agreement; but there is the question of the price of gold and we can no longer continue to go on pretending that an ounce of gold will always be worth thirty-eight dollars when it is now worth one hundred and six dollars.

On August 15, 1971, the President of the United States Richard Nixon announced the convertibility of US dollars for gold would be temporarily suspended. In particular France was not amused by the fact the US broke its promise; which was that the US dollar was as good as gold. 

After the anchor in the international monetary system was removed in ‘71 a diplomatic battle ensued about the value of currencies (and gold). The US wanted to cap the value of gold, while Europe wanted to revalue gold. This period is very interesting because I suspect it gave birth to the euro.

kissinger 4

Nixon to Kissinger 1971, October 28:

…I would like for you to talk to Schultz first. Burns has this idea that we have to move quickly with Europe. 

The French are key, they won’t make a deal unless we raise the price of gold. It is my view that we can’t. I don’t want you to say that to him but just remember that Arthur [Burns] is pushing for cutting a deal with the French.  

Schultz and I feel that would be a mistake. We have to keep free.

…The first thing to do is talk to George [Schultz] a little. I would like to get it where you, George, Connolly and I — would make this decision. I want to put Burns, McCracken and Peterson off.

I will resume publishing diplomatic documents from this era to find out exactly how the rest of the world (the Arabs, China, Japan, Russia and Europe) reacted and what measures were taken when the US broke its promise. If we figure out what happened in the past we have a better perspective on the future – so we can know more accurate when the US is forced to accept  the true value of gold.

Previously I’ve posted:

1971, October 28. Phone call between Nixon and Kissinger on gold

1971, December 13 & 14, Azores. Negotiations between Kissinger and Pompidou about the value of currencies and gold

1974, April 22 & 23, Zeist, The Netherlands. Meeting European Ministers Of Finance On Gold

1974, March 6, Washington, US. Note From the Deputy Assistant Secretary of State for International Finance and Development (Weintraub) to the Under Secretary of the Treasury for Monetary Affairs (Volcker): GOLD AND THE MONETARY SYSTEM: POTENTIAL US–EU CONFLICT

1974, April 25. Minutes of Secretary of State Kissinger’s Principals and Regionals Staff Meeting on gold

Below a conversation between the President of France George Pompidou and United States National Security Advisor Henry Kissinger. Paris, May 18, 1973, 11 a.m.

Source

FOREIGN RELATIONS OF THE UNITED STATES, 1973–1976
VOLUME XXXI, FOREIGN ECONOMIC POLICY, DOCUMENT 38

  1. Memorandum of Conversation (1)

Paris, May 18, 1973, 11 a.m. PARTICIPANTS:

  • President Georges Pompidou
  • Andronikov, Interpreter
  • Henry A. Kissinger, Assistant to the President for National Security Affairs

Dr. Kissinger: I am very pleased to see you again and to thank you once again for the arrangements that you have made for my visit here and which allowed me in particular to see in Paris President Sadat’s special envoy. President Nixon is looking forward with pleasure to seeing you in Iceland, (2) and he hopes to be able to reach some fundamental decisions on American policy towards Europe and other questions. In any case, he expects to work in close cooperation with France and with you. What are the questions that you would like to discuss now and in what order?

President Pompidou: We can discuss everything. There are some questions I would like to ask you about your speech.(3) You have already seen Mr. Jobert. I would especially like to mention those questions that I intend to discuss with President Nixon.

When you speak, in your speech, of the regional position of Europe, I am not particularly shocked by what you say. In this sense I am not entirely in agreement with everyone else. I would have been shocked if you had said that we do not have the right to have our own opinion, but you did not say that, and we do have our own opinion. I recognize however that Europe has influence and possibilities for action essentially in Europe, in the Mediterranean basin and in Africa, but that taken together the European countries represent a secondary power. This may shock some but it is more or less true, given that what I say not be taken in a restrictive sense. Likewise, when you declare that it is necessary to study things globally, I am less shocked than others. Of course it is necessary to study each problem in its own context, and for example commercial questions should be treated in the GATT. But we need to consider the entire context on all occasions. It would be impossible to agree, for example, on grapefruit while forgetting the general questions of politics, military problems or monetary problems. Your speech, nonetheless, did lead to considerable discussion; if some were shocked by your ideas I personally did not find your ideas so far from reality.

With President Nixon I would like to have very precise discussions. First of all, there is the monetary problem. We are certainly not going to solve the problem at Reykjavik. In any case the two of us alone could not solve the problem and nobody is yet ready. Nonetheless we cannot go on like this and not know at all where we stand. I would therefore like to discuss the monetary question and also the question of gold—not the role of gold because we could debate that in vain and we know that we are not in agreement; but there is the question of the price of gold and we can no longer continue to go on pretending that an ounce of gold will always be worth thirty-eight dollars when it is now worth one hundred and six dollars. We also have to worry about the enormous speculation on gold. I think that the general interest, as those of the United States and France, are not in conflict and that they are even congruent. I would therefore like to discuss the dollar and also its convertibility, not into gold but into other currencies. The present situation is ridiculous. Each week I have to buy florins and marks, which are weak or wavering, and I receive dollars that I cannot use. Conversely, we give dollars to the Germans or the Dutch. The problem is real, and I would like to discuss it. M. Giscard d’Estaing will come with me, but I have my own ideas that he does not necessarily share.

There are next trade questions and questions of agriculture. As I already told President Nixon in the Azores,(4)  we are making mistakes: we are in a period not of overproduction, but of underproduction. The Arabs, who are not exactly a model of unity, have nonetheless been able to reach understandings on oil while we have not been able to reach agreement on wheat. We sell to the Soviet Union and to China, and also to Japan, countries which can pay high prices, and we make of them dominant forces in the market place because we sell to them at low prices. I think it is possible to reach an understanding among France, the United States, Canada and perhaps Argentina, to constitute a sort of OPEC to direct the market, in which there are now shortages, which will only continue to grow, largely because population is expanding rapidly and production is not keeping up with it; and also because the Communist system is not productive. Will President Nixon be disposed to talk about these issues, without radically changing policy? Does he have some ideas on these issues or some practical propositions to make?

[Omitted here is discussion unrelated to foreign economic policy.]

Finally, there are commercial problems. Some are secondary and will be settled. Others, more important, require a certain cooperation between France and the United States in order to resolve them. There is no reason to always discuss issues with the Soviets and never with the United States, especially since these are not equivalent actions: when we sign with the Soviets a piece of paper where we say, for example, that we favor a free exchange of men and ideas we know perfectly well what that means and the limits that exist. But with you, it is a matter of real agreements. If it is written that such and such will happen, it will take place.

I would like to discuss all this with President Nixon and with you. We need to clarify our positions to each other. The position of France is fiercely independent. If it were not, we would be overwhelmed by someone or other, because of our relative weakness. Nonetheless we must believe in solidarity, we know this well, and perhaps we must even more than others. We may as well say this frankly so that we don’t run into contradictions at each step.

Dr. Kissinger: You will certainly be able to discuss all these questions with President Nixon.

[Omitted here is discussion unrelated to foreign economic policy.]

As for economic questions, our intention first is not to say that all problems should be dealt with by the same negotiators (there would certainly be different groups), but to make it understood that if the economic questions are not examined in a broader context and if they are only discussed by technicians then a confrontation is inevitable. Our discussions in the Azores are a good example of this. During the preparations for this meeting all our technicians pressed for organizing Germany against France and a confrontation based on the idea of a divided Europe. I am not an expert in monetary matters but I recommended that we discuss these matters with you in a broader context. It seemed to me that the solution we reached in the Azores was very reasonable at that time.

A difficulty and a danger that we notice today in the West (and to which you alluded) is that in each country there is a tendency to judge that a foreign policy is successful when it deals with relations with adversaries; there is no leader and no opinion who see success in our relations with friends. We believe it is essential to create again in each country commitments among friends. It is only in this way that we can resist the Soviet strategy which hopes to weaken our will to resist. It is with this intention that we drafted our “declaration of principle” to elicit common actions among friends.(5) Dealt with in this context I believe that economic questions, monetary questions or agricultural questions will find a sympathetic hearing by President Nixon. It would be a nightmare for us to have a deal for three more years with technical questions while the Soviet Union continues to gain in the psychological realm. When President Nixon has left and when President Pompidou will have completed his term, which is similar to that of Mr. Heath, we will find ourselves in a situation where it will be extremely difficult to organize a Western policy turned toward the future.

[Omitted here is discussion unrelated to foreign economic policy.]

President Pompidou: What you have told me is very important, of course, and I will think about it a great deal. All of this will remain among ourselves and M. Jobert. I place you in the position of Mr. Rogers in order to simplify life. Concerning economic and monetary matters, M. Giscard d’Estaing will naturally have a role to play. For the moment I have not told him anything. I can assure you that we are going to Iceland with the desire to achieve positive things.

[Omitted here is discussion unrelated to foreign economic policy.]

Dr. Kissinger: You will find that the mentality of the Chinese is quite close to that of the French: They are skeptical, precise, analytical and without sentimentality. You will note also in this group of old men a real knowledge of the Western situation. I have been rather surprised that their analysis of Europe is more intelligent than that of Bonn.

President Pompidou: Can you tell me a country whose policy is sentimental?

Dr. Kissinger: Germany.

President Pompidou: It is dominated by sentiment. That is not the same thing.

Dr. Kissinger: All countries tend to act in conformity to their national interest. In this sense the United States is particularly sentimental. Nonetheless not every country is capable of analyzing its own interests coldly. I think that the European left in general is not even able to analyze its national interests, with a few exceptions.

President Pompidou: In any case the text in which President Nixon asked Congress for economic powers was not at all sentimental.(6)

Dr. Kissinger: Not at all. But it is very important that we make understood in this commercial area that one cannot only strive for unilateral advantages. We must address ourselves to Congress on this because of public opinion. It is difficult however not to strive for unilateral advantage unless we can place ourselves in a broader context and a more important context. For example, our economists examined the question of reverse preferences and of compensation from associates of the Common Market such as Spain and Israel.(7)  I opposed this for six months, but it is difficult to find a political justification at present that one could oppose to Chinese exports towards the United States: in the case of delivery of $10 million worth of cotton, I had to refuse authorization. I am sure that if you and President Nixon managed to reach an understanding on general relationships, we could deal with commercial relations in a manner that will allow both sides to draw benefits. This in any case would be our attitude. If we sought to extract unilateral advantages from Europe, this would turn against us later on. From all evidence it will be easier to talk of these questions in a broader political context.

President Pompidou: If you would drop the term “reciprocity” somewhere, this would help a great deal. For our part we have strong ties with certain African countries, but I am not in favor of extending association everywhere. If we give it to everyone one ends up by not giving anything to anyone and by weakening the others. In fact I am not very far from your position even with respect to Japan. The Minister of Foreign Affairs, Mr. Ohira, said to me “Let us become allies against the United States.” I refused and I said that the United States wants Europe to proceed to make purchases in place of the Japanese; it is up to you to produce less or to buy more. I think that he understood.

Dr. Kissinger: In the long term Japan could present formidable problems for everyone, because it has no concept of global interests. It pursues its own interests so narrowly that this could be dangerous for all countries. It is impossible to have only trade surpluses toward everyone.

[The meeting then ended.] (8)

1 Source: National Archives, Nixon Presidential Materials, NSC Files, Kissinger Office Files, Box 56, Country Files, Europe, French Memcons (originals) January–May 1973. Top Secret; Sensitive; Exclusively Eyes Only. The meeting took place in President Pompidou’s office at the Elysée Palace. Kissinger was in Paris to discuss the implementation of the January 1973 Paris Peace Accord with DRV representatives. He also met with Egyptian National Security Adviser Hafez Ismail.

2 President Nixon and President Pompidou met in Reykjavik, Iceland, on May 31 and June 1. See Documents 40–42.

3 On April 23, Kissinger delivered a speech entitled “The Year of Europe” to the Associated Press editors’ annual meeting in New York City in which he called for a rein-vigoration of the Atlantic alliance. For the text of Kissinger’s speech, see Department of State Bulletin, May 14, 1973, pp. 593–598.

4 Nixon and Pompidou met in the Azores December 13–14, 1971. See footnote 6, Document 36.

5 In his April 23 speech on the need to reinvigorate the Atlantic alliance (see footnote 3, above), Kissinger called for the drafting of “a new Atlantic charter setting the goals for the future,” an expression of “a clear set of common objectives together with our allies.”

6 On April 10, President Nixon sent to Congress the Trade Reform Act, legislation that would give the President the necessary negotiating authority to start a new round of GATT negotiations and introduce important changes to existing U.S. trade laws. For the text of the President’s message to Congress, see Public Papers: Nixon, 1973, pp. 258–270.

7 The reverse preferences issue refers to the granting of trade preferences by LDCs to the EC in exchange for trade preferences granted by the EC to LDCs. The Spanish and Israeli association issue refers to preferential trading agreements between those two countries and the EC. The United States argued that it was being unfairly discriminated against by both arrangements and was at that time in the process of negotiating redress of these issues.

8 Brackets are in the original.

Koos Jansen
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  • Kirill Klip

    Dear Koos,

    Great work – keep it up!

    I would like to share this great video to cheer up all interested in Gold – your work will be sighted now more and more …

    http://kirillklip.blogspot.co.uk/2015/01/gold-set-to-rally-in-2015.html#

    Best regards,

    Kirill Klip.

    • SLK_R

      Is your blog where Sufiy continues? Sufiy seems to have gone silent and I am not aware of any reason. Are you the same person?

      • Kirill Klip

        :-)

  • http://www.MylesMoney.com/ Myles Money

    Excellent as always. Thank you, Koos.

  • Troy Ounce

    So a revaluation to present value would add app $308B to the balance sheet of the US Treasury. Peanuts.
    And to get rid of the $19T debt they would need to revalue gold to app $72K. Will not happen.

    The US can always steal the stuff. Has been done before & they are good at it!
    There are 6700 tonnes stored in custody at the NY Fed! And a gold confiscation with the population would add another few thousand tonnes. The counter value in US$ can just be printed, so no sweat. But how to handle the national unrest & international credibility?

    Looking at the above, it looks pretty desperate; my feeling is they will go for broke and let China decide on a revaluation as they have a vested interest in the $ value. FWIW.

    • Mick Price

      “And to get rid of the $19T debt they would need to revalue gold to app $72K. ”
      I don’t know, a few years of hyperinflation would do it.

      • disqus_3BrONUAJno

        If that were to happen, I wouldn’t have to worry about not having a pension. Of course, there have been various economists and wannabes who have said it is already worth $50K an ounce on the basis of dividing the total national debt (on and off budget) by the amount of gold they claim to hold (assuming it hasn’t been hypothecated to oblivion).

  • KingTut

    Koos, you do great work. I’m not sure what you goal is in drawing attention to the $42.22, but it is really not that important. The fed officials in the tape are right, the Fed only owns gold certificates, not gold. It got those certificates when FDR confiscated privately held gold in 1933, and being private, the Fed was required to surrender it’s gold too. Instead of getting cash at $20.76/oz, the Fed got certificates. Since, they were never redeemable for actual metal, they got a pretty raw deal even at $42 2/9, nearly twice the going rate. So this was never the price of real gold, just an historical fluke.

    One assumes the Fed’s gold was moved to West Point and Ft Knox just like the coin melt bars taken from the public. Notice that it is managed by the Army, not the Fed. Then at the end WW-II the USA had acquired something like 25,000 tons of gold. Since this huge hoard was confiscated from our enemies (who had first confiscated from our allies) it was likely kept under the control of the military.

    As part of Bretton Woods, the US dollar had become the reserve currency redeemable for gold by foreign governments. Redemption started right away, but most countries chose to keep their gold with the USA. Up until gold redemption was stopped, something 17,000 of those tons would have shipped from Ft Knox or west point to the Fed’s NYC vault. The story was that the gold was safer in NYC, than returned to its owners, but since when is the Fed safer than the US Military? Of course, the Germans and Japanese would have been subjected to restrictions after the war and probably had to keep their gold in NYC. The Brits likewise probably owed the US government substantial sums, and would ‘keep’ their gold in NYC too. The French had no such problems (having sat out the war), and shipped as much gold home as they could.

    There appears to have been an overt attempt to keep gold away from the Fed. Being privately owned by the big banks, which are in turn owned by mysterious US and European banking families, the Fed would not have been seen as 100% in support of US policy. So keep the gold away from them. However, at Bretton Woods the bankers managed to get access to the gold in the form of redemption to foreign governments, who would never see the actual metal. Notice that trade surpluses would not accumulate into the coffers of foreign governments, but rather as credit money in their banking systems. Again the bankers began to get control of the lost gold.

    Now the question is what happened to the 14,000 tons of gold the Fed is supposedly holding for other countries? Is that the source of the leased gold that has entered the market for the last 40+ years? Was it physically sold as part of the leases? Or did it, as Jim Rickards asserts, stay in the vault with the leases just being certificates that Bullion banks could use as collateral in the fractional reserve bullion market? This story will be told someday, but we may have to wait until after everyone still involved has passed.

    • KoosJansen

      Like I said, the valuation at $42.22 an ounce denies gold’s true value, and helps trust in the USD. The Fed New York even notes foreign gold deposits in USD. The exchange rate? The fantasy number $42.22.

      The Fed also got certificates for the rest of the gold didn’t they? Not only the gold they handed in? We can wonder what the value of such a certificate is when it’s not redeemable. I say its zero ;-)

      A lot CB gold was leased into the market and eventually sold (see FRBNY deposit records ie)

      Who bought it? Who knows…

      https://www.bullionstar.com/blog/koos-jansen/guest-post-the-rockefellers/

    • SLK_R

      The Fed does not need actual gold. Paper certs is just as good. By revaluing gold it can issue “New USD” each has face value $1000… can make $18 tr become $18b.

      Up to this point, no one needs actual gold and can just pretend. Problem comes when someone says “you say you have how many ounces as reserve… you are indebted to me via trade deficit so let me have some of those ounces now please”.

  • SLK_R

    Interesting to see power people at that time had some thinking and skilful negotiations to articulate. it is so new, as we only see puppets doing strongarming now.

    Interesting new line of work, Koos. I hope this will get to explain the destination of the Euro.

  • Jay

    Revaluing US gold reserves is not possible. Nixon did not default on our gold obligation he suspended convertibility. These obligation are still valid and in the system, Can anyone think of any reason why any country would sell or throw them in the garbage? If the US did revalue our reserves it would bring US gold into back into the monetary system where these countries would have legal claim on US gold reserves at 42.22. The US suspended for a reason … we do not have enough gold. Why risk such a thing for 300-350 Billion? 300-350 Billion brand new FRN and no gold in the future…. then again many are foolish enough to think such a thing is a good idea. Only the Euro has severed its ties to gold.

    • DameEdnasPossum

      ‘Nixon defaulted on (y)our* gold as he suspended convertibility.’

      Yep. He sure did. I recall he explicitly stated the word ‘temporarily’…44 years ago and counting. That qualifies as a default in any reasonable/ rational mind.

      [* Note: believe it or not but 95% of the world’s population are not US citizens. I know you think yourselves unique, indispensable etc. but there are in fact 7 billion other human beings on our planet with at least as much right to exist as you.]

      ‘These obligation are still valid and in the system’ – yeah, sure they are!!! And Mr.Yellen rides through the foyer of the Eeccles Building every morning on a unicorn that poops skittles.

      Q. Can anyone think of any reason why any country would sell or throw them in the garbage?

      A. Yep…because they know they are worthless and they’re tired of Washington blackmailing them into compliance in a manner that damages the welfare and interests of their own citizens.

  • AW

    Mr. Koos Jansen, I am in the process of reading your article and an important
    though popped into my head…

    Me thinks that the reason that they value gold at $42.22 per ounce is because the
    missing gold is actually a liability of the FED. So by understating their
    liabilities, the FED is overstating their financial position.

    If the FED does not have the 6,700 tons of gold that it is supposed to be holding
    on behalf of the United States and Europe, then this 6,700 tons is actually a liability
    owed by the FED.

    At $1,230 per ounce this would equate to a $257 Billion liability, and would
    probably render the Federal Reserve Bank of NY insolvent.

    At $42.22 per ounce, this would equate to only a $8.8 Billion liability, which
    doesn’t sound all that bad.

    P.S., when are the Chinese Silver vaults going to run dry?

    Cheers,

    • disqus_3BrONUAJno

      The Fed has claimed multiple times to be in possession of no precious metals.

  • Ed

    The current spot price of gold, around $1200 per oz, isn’t by any means the “free market” price of gold. The current spot price is artificially suppressed by market actors who are dealing in fraudulent paper sales of gold they don’t have.

    Just sayin’……

  • Mick Price

    “On August 15, 1971, the President of the United States Richard Nixon announced the convertibility of US dollars for gold would be temporarily suspended.”
    And it’s going to be resumed Real Soon Now.

  • disqus_3BrONUAJno

    We shouldn’t be surprised if the federal government wants to pretend that the price of gold is $42.22 since they have pretended to be a constitutional republic for long after they have stopped acting like one in favor of a bipartisan dictatorship.

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