Foreign Countries Held Hostage by the Federal Reserve*
By Valentin Katasonov
Several days ago the US Federal Reserve updated its official website to reflect the foreign official assets held by US Federal Reserve Banks (the Fed). To a large extent that means the Federal Reserve Bank of New York, which accounts for well over half the assets and capital of all 12 of America’s Federal Reserve Banks. The New York Fed serves foreign nations (meaning their official monetary agencies in the form of central banks and treasuries) by placing currency in deposit accounts, storing and registering securities in a specialized depository, and storing gold in the form of standardized gold bars in its underground storerooms in Manhattan.
The gold vault in Manhattan was built after WWI, in the early 1920s, when the US already possessed a great deal of gold – several thousand tons. But even taking that cache into account, the plans to build a vault for the New York Fed still seemed ambitious. It included 122 compartments and was designed to house over 12,000 tons of metal. Apparently, this «custodian of money» was already assuming that it would not only store its own gold there, but also offer foreigners its storage «services» for yellow metal.
An overview of the foreign reserves currently stowed in the US is provided below.
Foreign official assets held at US Federal Reserve Banks (billions of dollars, at the end of the year/month)*
These tables suggest the following conclusions:
First, the great majority of all foreign reserves held in the United States are US government debt securities (Treasury securities and US government agency securities). These account for 99.9% of the total sum calculated in the table provided. These assets (securities) are held in US Fed depositories.
Second, during this period (from the end of 2011 to the end of February 2015), the total foreign reserves parked at US Federal Reserve Banks did not change significantly. The one exception was «Deposits.» In 2011, the US Fed held almost no such funds. But beginning in 2012, foreign governments began to stow some of their foreign reserves with the US Fed. This picture does not back up the statements made by some politicians, journalists, and other experts who argue that many states have begun to withdraw their reserves from the US under the threat of potential US sanctions. For example, an $859.7 billion hike was recorded last year (2014) in US Treasury securities held in US Fed depositories (a jump of 29.3%).
In the first half of March 2014, experts noted a record decline in American T-bonds owned by other countries’ monetary agencies and placed in the custody of the US Federal Reserve system. In the week of March 5-12 of this year, a total of $104.5 billion in Treasury securities were withdrawn from the Federal Reserve depository in New York. That was the most ever documented since such records have been kept.
Economists at the research firm Wrightson ICAP have suggested that Russia could pull its Treasury securities out of the Fed’s depository.
According to the analysts at Wrightson ICAP, such an action might be prompted by the West’s incessant threats of sanctions against Russia because of events in Ukraine. Wrightson ICAP also rightly emphasized that the changes in the Fed’s Treasury holdings do not reflect a change in direct investments in American debt securities, but rather a change in the depository agreements with foreign holders of government securities.
At the time many experts saw this as the start of a new trend. However, that trend did not materialize, and growth in foreign portfolios of Treasury securities at US Fed depositories was rekindled. The first two months of 2015 saw a decline in securities holdings, but not to a significant extent (about $10 billion). It’s still too early to talk about a new trend.
Incidentally, according to the latest figures from the Federal Reserve, by the end of February 2015 the total of all US debt securities in other countries’ international reserves amounted to $3,784.3 billion. Thus, 76.7% of all the debt securities owned by other countries’ monetary agencies are currently being held in US Federal Reserve depositories. About one quarter of all international reserves in the form of US debt securities are stowed in depositories outside the United States. This is a fairly hush-hush topic, but it is not entirely a secret that that the largest non-US depository is located in Belgium. Since this country is tightly controlled by Washington, parking securities in a Belgian depository does little to make them less vulnerable to an asset freeze. A drastic way for a country to shelter itself from sanctions could be to pull its international reserves out of US Treasury securities and shift them into securities and bank deposits in countries that are outside Washington’s sphere of influence. But the best option would be to convert international reserves into gold.
At a casual glance, the percentage of gold in foreign states’ international reserves that are held by the US Federal Reserve is minute – an almost microscopic amount. However this is an illusion that Washington creates using statistical sleight of hand. The fact is that the monetary value of the gold in the custody of the US Fed is calculated using a gold price of $42.22 USD per troy ounce of pure metal (31.103 grams). That was the official price of gold in the early 1970s, during the last months of the Breton Woods currency system. But other than the US, not a single country in the world today values its official gold reserves on the basis of prices from over 40 years ago. Most countries now calculate their gold-reserve data using current prices. Or else using fixed prices, but which are tied to today’s market for yellow metal. At times the price of gold has neared $2,000 per troy ounce. In early April 2015, gold cost $1,200 per ounce. The end of the London Gold Fix on March 20 and the transition to a more liberal method of setting market quotations for the yellow metal will cause the price of gold to begin to soar. Undervaluing the price of gold, which has been Washington’s sub-rosa policy for decades, has made it possible to artificially maintain the dollar’s prestige and artificially inflate its exchange rate. Masking the real standing of gold in international reserves has been part of this policy.
By recalculating the cost parameters of the foreign reserves of gold held in the custody of the New York Fed, an impressive picture emerges. At last check they exceeded 6,000 tons in terms of pure metal. That is only 2,000 tons less than the official gold reserves belonging to the US Treasury (which at the beginning of 2015 totaled 8,133.5 tons). For comparison here is some data on the countries with the largest official gold reserves after the US (in tons, also at the beginning of 2015):
Germany – 3,384.2
Italy – 2,451.8
France – 2,435.4
Converted to today’s prices, the foreign gold reserves held in the custody of the US Fed are worth over $230 billion. We may very soon see a surge in the price of this yellow metal. Some experts estimate it could grow by a factor of 2-3 or even 4-5 or more (i.e., a new price equilibrium is possible with respect to the current price). It is conceivable that in monetary terms, the value of foreign gold reserves held in US custody could in time reach a trillion dollars or more.
Currently Germany and several other countries are trying to reclaim their gold from the vault of the Federal Reserve Bank of New York, where all the foreign gold stored in the US is amassed. However, the US does not want to part with this gold from overseas. During 2013, judging by US Federal Reserve statistics, foreign nations managed to rescue only five tons from American «captivity,» then 177 tons in 2014, and another 30 tons during the first two months of 2015. That amounts to 212 tons, or 3.4% of the total volume of foreign gold in the vaults of the Federal Reserve Bank of New York.
Today we see how obediently Europe toes the line of Washington’s policy, including when it comes to helping levy economic sanctions against Russia. Part of this political course charted by Washington’s allies can be explained by the fact that they have become hostages to this «service» to store gold and other international reserves within the US Federal Reserve system.