Former Fed governor hints at big upward revaluation of gold (23:50min.)

[LargoWinch]

"Interviewed Monday this week on the "Trading Day" program of Business News Network in Canada, former Federal Reserve Governor Lyle Gramley hinted that a big upward revaluation of gold may figure heavily in the Fed's attempt to rescue the U.S. economy. The program's guest host, Niall Ferguson, an author and history professor at Harvard, asked Gramley, now senior adviser at Stanford Group in Houston, about the seemingly grotesque expansion of the Fed's balance sheet in recent months. Ferguson asked: "I've heard it said that the Fed has turned into a government-owned hedge fund, leveraged at 50 to 1. Do you feel nervous about what this might actually do to the Fed's reputation?" Gramley replied: "I think you have to reckon with the fact that one of the Fed's assets is gold certificates, which are priced, as I remember, at $42 an ounce, and if we were to price them at market prices, the Fed's leverage would look a lot less than it is now."


Can you say something like this on live tv as an ex-Fed governor? I guess only in Canada.

For Mr. Gramley's comments about gold tune in at 12:10min.


http://watch.bnn.ca/trading-day/dece...cember-8-2008/
Runtime: 23min.50sec.


(Sorry I cannot embed this one)
- W.

[Slimprofits]

Re: Former Fed governor hints at big upward revaluation of gold (23:50min.)

Recapitalization of the Federal Reserve System
Edward Guay
Wintonbury Risk Management
September 22, 2008

The Treasury has $11.041 billion of gold on its books, but it carries the gold at $42.22 per troy ounce. At current prices, that gold is worth more than $200 billion. The Treasury pledged the gold to the Fed years ago as initial capital, but it was deposited in the Fed in the form of gold certificates, rather than actual bullion. The certificates are valued on the books of the Fed at adjusted book value ($11.037 billion).

If the Treasury were to put the actual gold into the Fed at book in exchange for the gold certificates, they could increase the capital base of the Fed at no budget cost. The gold could be revalued and carried on the books of the Fed at a four year moving average (currently $638.70) of the market price (currently $903.50). Revaluing the gold after it is transferred to the Fed would prevent the gain on revaluation from being mischaracterized as revenue in the budget. The gold injection would sharply increase the capital base of the Federal Reserve System and make it clear that Fed is still the most strongly capitalized central bank in the world. There has been some nervousness recently in both foreign and domestic financial centers about the extent to which the Fed has already leveraged its capital. The capital of the Fed would increase from the current book level of $41.3 billion to $167.0 billion, using the moving average approach to valuation. The Fed's total assets are currently $996.1 billion. The gold injection or revaluation would reduce the current leverage from 24.1 times to 6.7 times, reflecting the gold revaluation in both assets and capital.

*****

What is the leverage level now?