By Patrick A. Heller January 04, 2010

On Dec. 30, the Gold Anti-Trust Action Committee, Inc. (GATA) filed suit against the Federal Reserve in the U.S. District Court for the District of Columbia. The suit seeks a court order for the Federal Reserve to more fully respond to GATA’s Freedom of Information Act requests (which date back to December 2007) to learn information about the Federal Reserve’s involvement with gold swaps from 1990 to date. The text of the suit can be viewed at http://www.gata.org/files/GATALawsuitVs.Fed-12-30-2009.pdf.

The Fed’s responses have disclosed some information, but also indicated that a significant amount of information was not released, using various claims of exemptions from disclosure.

For instance, in a letter by Federal Reserve Vice Chairman Kevin Warsh to GATA dated Sept. 17, 2009, (available at http://www.gata.org/files/GATAFed Response-09-17-2009.pdf), Warsh acknowledges that the Fed has gold swap arrangements with other central banks, but claims an exemption from disclosing the details.

GATA anticipates that the course of this lawsuit may take years. However, any public disclosure of such information would clarify just how much gold reserves the U.S. government really owns out of the total of 261 million troy ounces of “gold reserves and custodial gold” that it now claims to possess.

There are significant circumstantial indications that possibly more than 100 million ounces of former U.S. gold reserves have been surreptitiously leaked onto the gold markets over recent years in an effort to suppress the price of the precious metal.

The Federal Reserve has staunchly opposed disclosing the true balance of gold reserves and fought any outside audit of them such as would be part of Rep. Ron Paul’s, R-Texas, “Audit the Fed” legislation (with 317 co-sponsors) approved by the House Financial Services Committee and now awaiting action on the floor of the House of Representatives.

Any confirmation that the Federal Reserve or the U.S. government has disposed of gold reserves and covered up this information would have dire consequences for the value of the U.S. dollar – and would lead to a soaring gold price.

Stay tuned for developments.

As measured in U.S. dollars, the price of gold climbed 23.9 percent in 2009, the ninth consecutive year that the price of gold has risen against the dollar. Even though that is a spectacular result, it is still only the third highest percentage increase of the decade, following the 24.7 percent jump in 2002 and the 31.4 percent rise in 2007.

Gold also rose by more than 20 percent in 2009 against other major currencies such as the Chinese yuan, euro, Japan yen and Swiss franc.

As good as gold’s result was, by the way, silver rose 49.3 percent against the U.S. dollar in 2009.

The U.S. Mint has delayed the initial release of 2010-dated gold and silver Eagles until Jan. 25. For many years, the Mint had released the new coins in the first week of the year. It is possible that some coins released on that date may be 2009-dated.

You can place orders right now for 2010-dated coins with the Mint authorized purchaser network, but wholesale premiums are now higher than normal because the U.S. Mint will not say flat out just how many 2010 coins will be available in the first release. It is possible that premiums will decline in later releases, but those who wait run the risk of higher spot prices.

Although gold did not end 2009 at its high for the year, there are some developing issues that point to possible near term increases.

On Dec. 30, the International Monetary Fund reported that the U.S. dollar had declined from 37.3 percent of global official foreign exchange reserves at the end of June 2009 to only 36.3 percent at the end of September. Holdings of euros, yen, and British pounds all rose in the third quarter of 2009. Dollars held in official reserves peaked at $2.81 trillion at the end of September 2008 and are now down to $2.73 trillion. To the extent that the U.S. dollar continues to decline in official reserves, its value will fall and the price of gold will rise.

Another sign that the U.S. dollar was falling out of favor is the recent surge in the interest rate on U.S. Treasury debt. At the end of 2008, the 10-year Treasury note yield was 2.253 percent. As of Dec., 1, 2009, the yield was 3.28 percent. On Dec. 30, the yield was up to 3.786 percent, an increase in the rate of 15.4 percent for December and 68 percent for the year.

This huge increase in the interest rates in such a short period of time is flashing alarms that there may be significant hikes in consumer prices very soon. The effects of the massive U.S. government inflation over the past two years may be about to slam private citizens in their pocketbooks.

There are three indicators of shortages of physical gold on the market. First, on the London Bullion Market Exchange, there are repeated attempts from buyers wishing to place large orders for gold, but they are consistently turned down in recent weeks. Second, in India, the world’s largest gold consuming nation, the price of gold is currently trading at $6-$7 above the world spot price. The spot price in India is usually close to the world price and is frequently slightly below it. Third, the price of gold in Vietnam, which has become one of the world’s largest gold consuming nations in response to its rapidly depreciating domestic currency, is now more than $40 above the world price. The Vietnamese government has just announced that it will close 20 gold exchanges by March, supposedly because they were insufficiently regulated. What I think will happen is it will simply add to the private sector demand in that country to acquire physical gold.

The year 2009 was certainly exciting for precious metals markets. I anticipate that results for 2010 will be even more exciting and positive – and possibly quite soon.



Patrick A. Heller owns Liberty Coin Service in Lansing, Michigan and writes “Liberty’s Outlook,” the company’s monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at http://www.libertycoinservice.com. Other commentaries are available at Financial Sense University (www.financialsense.com). His periodic radio interviews on WILS-1320 AM can be heard at http://www.amlansing.com, on the Korelin Economic Report at http://www.kereport.com, and on Coin Chat Radio at www.coinchatradio.com.



More Resources:

• 2010 U.S. Coin Digest, The Complete Guide to Current Market Values, 8th ed.

• State Quarters Deluxe Folder By Warmans

• Standard Guide to Small-Size U.S. Paper Money, 1928 to Date

• Strike It Rich with Pocket Change, 2nd Edition