The US Treasury Responds

Copyright © 2000 by Freemarket Gold & Money Report. All Rights Reserved.

First published on April 10, 2000 in FGMR #262

At last the Treasury Department has answered my inquiry from August about the auditing of the US Gold Reserves. I have just received a March 29th letter from Mr. Dennis S. Schindel, Assistant Inspector General for Audit, who works in the Department of the Treasury, Office of Inspector General.

Mr. Schindel was responding to the February 28th letter I sent to my Congressman, The Honorable John Sununu (see Interim Letter No. 259a, dated February 28th, 2000), who forwarded my letter to the Treasury for a response. Mr. Schindel's letter states in part:

"Government Auditing Standards incorporate the American Institute of Certified Public Accountants' generally accepted standards of field work and reporting. The observation of inventories is a mandatory generally accepted auditing procedure. Auditing standards also state that it is necessary for the auditor to be present at the time of inventory count and, by suitable observation, tests, and inquiries, must satisfy himself about the effectiveness of the methods of inventory-taking and the measure of reliance which may be placed upon management's representations about the quantities and physical condition of the inventories.

I offer the following responses with respect to your specific questions:

1. As of September 30, 1998, the Office of Inspector General (OIG) had observed and audited 97 percent of the total gold fine troy ounce inventory held by the United States Mint's (Mint's) Fort Knox facility. The inventoried gold reserve is maintained under an Official Joint Seal placed on each gold compartment and cannot be opened without an OIG employee being present. The Mint's Gold and Silver Reserves have been audited annually since 1978 on a rotational basis. Our audits include a review and assessment of the physical security at each facility. The audit work has been performed in accordance with Government Auditing Standards.

2. During each OIG inventory observation, a sample of gold bars is selected for further testing. The sample bars are weighed and compared to the weights stamped on the bars and Mint books and records. In addition, chips of gold are sent to an outside laboratory where they are assayed to determine the fineness of the sample bars for comparison to Mint books and records. No material discrepancies were noted during our inventory observations."

On the surface these statements seem to be fairly clear and unequivocal. It would appear that the US Gold Reserves have been properly accounted for and audited.

I could nit-pick several of the points in Mr. Schindel's letter. For example, it seems logical and prudent to me that the audit of the US Gold Reserves be performed annually by a private sector firm, rather than the federal government's own auditors in the OIG. But according to Mr. Schindel's letter:

"The OIG performs independent audits of the gold reserve at Fort Knox. Private sector accounting firms are not used because of the sensitivity of the inventory. The OIG conducts these independent audits in accordance with Federal Government and private-sector auditing standards."

I'm not sure what Mr. Schindel means by his comment "the sensitivity of the inventory". The weight of Gold being held in the reserve is not classified information. Also, does he mean that he uses both federal government and private sector accounting standards, or just elements from each? And if so, are prudent standards being maintained?

In any case, I had also written another letter directly to the Director of the US Mint, raising basically the same points in my letter to Mr. Sununu. By coincidence (?), I received the US Mint's response the same day as the letter from the Treasury. While the two letters are very similar, the US Mint's letter makes a stronger statement on certain auditing procedures. Responding for the US Mint was Mr. Jay M. Weinstein, Associate Director/CFO. In his March 28th, 2000 letter Mr. Weinstein states:

"I would like to clarify the role of the Treasury, Office of the Inspector General, (OIG), regarding the physical verification and assaying (verification) of the gold and silver under the custody of the United States Mint. The OIG acts an independent third party during the verification process...[and] annually, the OIG independently identifies, from the inventory under custody of the United States Mint, specific locations to be verified. This verification requires a 100% count of material in that location, sample weighing and assaying, based on statistical sampling determined independently by the OIG of the verified material. The results of this verification are then compared to the custodial books and records of the Mint."

Mr. Weinstein then goes on to the important part of the auditing process, and clearly states the procedure used by the OIG in their audit of the Gold Reserves.

The last time an independent third party [i.e., the OIG] physically counted the gold reserves at Ft. Knox and compared the count to the US Mint's accounting records was March 1998. At that time, staff from the...[OIG]... witnessed/observed a 100% count of bars from a randomly selected compartment under the custody of the United States Mint at Fort Knox. They also independently selected, for weighing and assaying, bars from that compartment. They observed the drilling and assumed control of gold samples for assay purposes. These samples were then independently assayed by a third party laboratory. To date, 97% of the custodial gold at Fort Knox has been verified in this manner."

Note that there are some differences between Mr. Weinstein's account and that provided by Mr. Schindel. For example, Mr. Weinstein states that bars are drilled (which is the procedure that I would expect), whereas Mr. Schindel states that only chips from the bars are assayed. But the inconsistencies between these two accounts are minor. So what's my conclusion? It would appear that the Gold Reserve is properly stored in Fort Knox and the other storage vaults. It would appear that the Gold Reserve is being properly accounted for and audited.

When I begin this process last August, I didn't know when or how it would end. But my guiding principles were identified by me in Interim Letter 259a. I stated therein that my strategy had two elements to it.

First, I am still in what I believe to be the fact finding stage, and I intend to go about finding the important facts diligently, even if my progress is slower than I would like. Obviously I would like to send an independent audit team to Fort Knox right now, but that course of action is not practical. Therefore, I continue to gather the facts in order to build up enough evidence to make a judgement. And I've not reached that point yet.

Second, despite the apparent run-around I have received from the Department of the Treasury, I continue to give them the benefit of the doubt. In other words, rightly or wrongly, for now I assume that they are properly taking care of the Gold Reserves, including that portion stored in Fort Knox.

I think that I have satisfied myself by this endeavor, and that I have gathered sufficient facts to make an informed judgement. It would appear that the Gold Reserve is intact, safely stored in Fort Knox and the other storage sites.