EDITOR NOTE: In addition to telling the story of a possible high-ranking Chinese defector named Dong Jingwei, economist and gold expert James Rickards examines the possibility that the Fed has a massive stockpile of hidden gold. The investigation revolves around a mysterious asset of the Fed’s balance sheet called a “gold certificate account” that could represent 261.4 million ounces of gold. At the current market price, that would be $470 billion. While Rickards can’t confirm or rule out the Fed’s hidden gold, he does leave open the possibility “that gold is not dead as a financial asset. In fact, the Fed’s balance sheet is actually propped up by $470 billion of hidden gold value.”
James Bond fans (myself included) imagine that the best intelligence comes from secret agents who move covertly in enemy countries, recruit sources, gain access to secret documents, and then bring that information back to headquarters. The name for this technique in the CIA’s clandestine service — officially the Directorate of Operations — is HUMINT, short for Human Intelligence.
Sometimes the defection is more dangerous, such as when the defector is still in his home country and has to be smuggled out by some means to avoid arrest and certain death. There are significant collections from spies, but most intelligence actually comes from electronic signals (known as SIGINT) or from defectors. The defectors are the most-valuable source. They can simply walk into a US installation such as an overseas embassy or US office of a branch of the intelligence community and offer to tell everything they know.
Their information is so valuable because it’s fresh, firsthand, and includes data and insights that no secret agent could ever get on his own.
High-ranking official with info about spy networks in the US
It’s possible that the most-knowledgeable defector in history has just turned up at a US agency offering to provide inside information on the Communist Party of China and with ‘terabytes of data’ on portable electronic devices.
As reported in this article, the defector’s name is Dong Jingwei and he was the second-highest ranking official in the Ministry of State Security, which is China’s internal state intelligence service. Dong reportedly has information on the Chinese spy network in the US and on the fact that the COVID-19 virus was engineered in the Wuhan Institute of Virology.
China denies rumours, says it’s business as usual
There’s some debate about the authenticity of this story. Last week, China issued a news report saying that Dong was at his desk conducting business as usual. The problem was that no photos of Dong were included with the story. Some China experts, including Gordon Chang, say that the absence of photos indicates that the Chinese denial is propaganda, and the defection story is true.
If it is true, it explains why the mainstream media are suddenly giving credence to the laboratory leak theory of the pandemic after a year of denial. They know the true story is coming out through the defector, so they want to cover their own tracks as puppets of Chinese propaganda.
We’ll continue to follow this. For now, it appears the defection story may be true, and the US may have been handed the greatest intelligence bonanza since…well, since James Bond.
Does the Fed have a hidden asset?
When analysts discuss the Fed balance sheet, they tend to look at line items such as the composition of assets (mostly Treasury bills and notes and mortgage-backed securities) and the composition of liabilities (mostly excess reserves on deposits from banks, base money supply, and currency in circulation). More astute analysts look at the Fed’s capital base, which is only US$39.6 billion. With total assets of US$8.1 trillion and capital of only US$39.6 billion, the Fed is leveraged over 200-to-1. Most hedge funds consider 3-to-1 leverage highly risky. The Fed looks like the riskiest hedge fund ever.
In this article, an anonymous writer takes on the topic of the Fed’s balance sheet, including what he describes as a hidden asset. The writer who goes by the pen name of Doomberg (a clever play on Bloomberg), begins his exploration of the mystery of the Fed’s hidden asset with a look at my 2016 book, The New Case for Gold. In particular, he refers to a quote from my book that says the Fed carries an asset on its balance sheet described as a ‘Gold certificate account’.
When you explore the balance sheet details, you discover that the book value of the gold certificate account is US$11 billion, but the gold behind the certificate is valued at US$42.22 per ounce.
Of course, if you compute the amount of gold it would take to equal US$11 billion at US$42.22 per ounce, you come to a figure of 261.4 million ounces. If you were to revalue that amount of gold at the current market price (about US$1,800 per ounce), you find that the gold represented by the certificates is actually worth over US$470 billion! In other words, the Fed has an asset valued at US$11 billion, which is actually worth US$470 billion, giving the Fed US$459 billion of hidden capital.
If that capital were added to the US$39.6 billion of stated capital, the Fed’s real capital is almost US$500 billion. That reduces the leverage ratio from 200-to-1 to about 16-to-1. That’s still high, but 16-to-1 is not unusual for a normal commercial bank and it’s not excessive for a central bank.
Billions in hidden gold value
Doomberg goes on to explore this topic with some interesting charts and other analyses. He leaves out the origin of the gold certificate. That’s a piece of paper the Treasury gave the Fed in 1934, when the Treasury took control of the Fed’s gold. The Fed had earlier taken control of the gold from commercial banks. So the gold moved in stages from private hands to commercial banks to the Fed and finally to the US Treasury.
There’s a lot more to the story, which I describe in my book. The point is that gold is not dead as a financial asset. In fact, the Fed’s balance sheet is actually propped up by US$470 billion of hidden gold value. But good luck finding it in the Fed’s financials.
Original post from Daily Reckoning