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Gold Bars

Source: Encyclopedia of Banking & Finance (9h Edition) by Charles J Woelfel
(We recommend this as work of authority.)

Gold ingots.  In accordance with the Gold Reserve Act of 1934 and Presidential Proclamation of January 31, 1934, pursuant thereto, the entire monetary gold stock of the U.S. was vested in the Treasury of the United States, including some $3.5 billion held by the Federal Reserve banks.  Monetary gold, therefore, has been nationalized since that time.

Until March, 1968, when the two-tier price system for gold was internationally agreed to by the seven active member nations of the Gold Pool (Belgium, West Germany, Italy, the Netherlands, Switzerland, United Kingdom, and the U.S.), private buyers in the U.S. (for industry and the arts) could obtain their gold from the U.S. Treasury at the monetary price of $35 per ounce (plus 0.33% and regular MINT charges).  After March, 1968, such supply by the U.S. Treasury and by the other referenced nations to the private gold markets ceased, and nonmonetary uses were filled through the free gold markets (London and Zurich) and licensed dealers (there were some 1,400 firms licensed by the U.S. Treasury to deal in gold).

Public Law 93-373 ended the ban on private ownership of gold by U.S. citizens as of December 31, 1974.  Previously, Congress had amended the Gold Reserve Act of 1934 by P.L. 93-110, September 21, 1973, which permitted private citizens to hold gold when the President found that the elimination of regulations on private ownership of gold would not adversely affect the U.S. international monetary position.

In connection with P.L. 93-373, the Board of Governors of the Federal Reserve System authorized the presidents of the district Federal Reserve banks to send a letter to their member state banks regarding banking prudence in gold-related transactions.  Text of the letter, as authorized December 4, 1974, was as follows.

Public Law 93-373 provides that on December 31, 1974, the ban on private ownership of gold will end.  After that, United States citizens may own gold and trade in it as they might any other commodity.  National banks possess statutory authority to buy and sell "exchange, coin, and bullion," and some state laws contain similar provisions with respect to state-chartered banks.  The Office of the Comptroller of the Currency has determined that gold will not be acceptable as bullion unless it has a fineness of 0.900 or better.

For the past 41 years, United States citizens have been able to hold gold only under U.S. Treasury license.  During this period, private individuals and banks have had negligible experience with gold.  Gold is not legal tender.  Rather, it is a highly speculative commodity, subject to widely fluctuating prices.  In the light of these circumstances, state member banks will wish to proceed cautiously, should they decide to provide gold-related services to customers.

The Federal Reserve System believes that the following information will be useful to state member banks in the event that they decide to participate in gold transactions.  Similar information is being issued by other federal banking agencies with respect to banks under their jurisdiction.

If a bank does decide to engage in gold-related activities, it ordinarily would be preferable for it to act only on a consignment basis or otherwise as agent.

The risk inherent in gold transactions is such that any state member bank considering acting as principal with respect to gold transactions should give advance notice to the Federal Reserve bank of its district.  The advance notice should contain information relative to experience of personnel, services to be provided, anticipated inventories and positions, safekeeping facilities, insurance coverages, audit procedures, and anticipated impact on earnings.

Banks should not engage in the business of issuing receipts for gold without considering the implications of securities laws; and any gold for which a bank issues any form of receipt must be physically held on hand at all times and under strict safeguards.  Moreover, obligations payable in gold or its equivalent are still unenforceable (Public Resolution of June 5, 1933, 31 U.S.C. 463).

As with any commodity loan, it is anticipated that banks will carefully consider such matters as adequacy of margins on loans collateralized by gold, precautions to assure authenticity and safe custody of gold held as collateral and total risk exposure from gold-related loans.  Moreover, gold-related loans should be considered nonproductive credits unless extended for commercial or industrial purposes.

If a bank should decide to offer gold for sale, it should carefully avoid excessive or misleading promotions which could lead to unrealized expectations by bank clients and adversely affect public confidence in a particular bank or the banking system.

Examiners will pay strict attention to the relevant accounting practices of banks and recordkeeping for accounts of customers.  Any gold owned should be shown on financial statements under "other assets," and any hedging futures contracts should be shown as a memorandum item.  It would be anticipated that a bank would revalue accounts at least monthly to reflect current market values.

During examinations of state member banks, examiners will review closely a bank's total involvement in gold-related transactions to assure that individual banks and the banking system are not exposed to undue risk.  Among other considerations, examiners will be concerned with management's expertise in this area, risk undertaken in relation to the bank's equity capital, and the needs of customers.  An undue concentration of gold loans, as with any imprudent involvement in gold transactions, could constitute an unsafe or unsound banking practice subject to action under the cease-and-desist provisions of the Financial Institutions Supervisory Act of 1966.  Our examiners are instructed to be vigorous in countering any manifestations of bank speculation in gold.

At the same time, the Board of Governors of the Federal Reserve System made available to member banks a statement, in the form of a series of questions and answers, regarding the treatment of gold by the Federal Reserve banks.  The statement indicated that gold may not be used to satisfy reserve requirements because the Federal Reserve Act provides that only vault cash consisting of U.S. currency and coin and Reserve bank balances may be so counted.  In addition, it indicated that the Reserve banks will neither perform services related to gold transactions by member banks nor accept gold as collateral for advances to such banks.

As of 1981, the Comptroller's Handbook for National Bank Examiners (Sec. 403.1) pointed out that although P.L. 93-373 removed the ban on private ownership of gold by United States citizens, the statute did not provide for a total elimination of prior law on gold transactions.  The National Bank Act provides that national banks may exercise their powers "by buying and selling exchange, coin and bullion."  Consequently, banks may deal only in gold that qualifies as coin or bullion.  The term "coin" means coins minted by a government or exact restrikes, minted at a later date by or under the authority of the issuing government.  The term "bullion" refers only to gold and silver.  Platinum, or any other precious metal, is not considered degree of purity.  The Office of the Comptroller of the Currency has determined that, for national banks, gold of 0.900 fineness or better is acceptable as bullion.  In most cases banks handle gold of 0.995 or 0.9995 purity, and any gold of less than 0.900 purity will be considered an alloy in which national banks will not be permitted to deal.  National banks should have available, for inspection by national bank examiners, evidence of the purity of the bullion they have in inventory.

Even though U.S. citizens have been permitted to own gold since December 31, 1974, they still are bound by the Joint Resolution of June 5, 1933 (31 U.S.C. 463).  That resolution declares that contract clauses under which obligations are payable only in gold or in an amount of money measured by the value of gold are against public policy and are unenforceable.  The restrictions contained in the BANKING ACT OF 1933 that prohibit investment in or underwriting of securities also are applicable to securities of companies involved with gold.

Pursuant to the Gold Reserve Act of 1934, monetary gold reserves of the U.S. shall be maintained in bullion form, the standard monetary size being 400 ounces (troy).  Gold bars, however, come in a variety of commercial sizes, including the kilogram size (used by the jewelry trades) and 1,200-ounce (troy) size poured at the mine.

See STANDARD BULLION

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