Some interesting news broke this week concerning the latest developments in the dethroning of the US dollar as in the world’s reserve currency system.
Dave Kranzler of Investment Research Dynamics comments on the news from Nikkei Asian Review that China is preparing to release a yuan-denominated oil futures contract that is convertible (backed by) physical gold.
If this comes into being it would be another significant blow to the current global monetary system.
However if China does go ahead with this plan and allow oil exporters such as Russia and Iran to circumvent U.S. sanctions by trading in yuan there is a key question remaining.
The report says, “To further entice trade, China says the yuan will be fully convertible into gold on exchanges in Shanghai and Hong Kong.”
But it makes no mention of whether oil suppliers who choose to convert the Yuan to gold will be allowed to take their gold out of China. Something that is not allowed currently. So unless or until this was allowed, this new payment option is unlikely to be a total dollar killer. Nonetheless an interesting development worth reading about, assuming the report is accurate…
By Dave Kranzler
First published at: Investment Research Dynamics
It’s a strategic move swapping oil for gold, rather than for U.S. Treasuries, which can be printed out of thin air. – Grant Williams
A report released by the Nikkei Asian Review indicates that China is prepared to release a yuan-denominated oil futures contract that is convertible (backed by) physical gold. The contract will enable China’s largest oil suppliers to settle oil sales in yuan, rather than in dollars, and then convert the yuan into gold on exchanges in Hong Kong and Shanghai.
This is a significant step in removing the global reserve currency status of the dollar and resetting the global economic and geopolitical “landscape.” Over the past several years, China has quietly established yuan-based currency exchange facilities, which has set up the ability to implement this new non-dollar trade settlement financial instrument. According to the Brookings Institute, 34 Central Banks around the world have signed bilateral local currency swap agreements with the PBoC as of of the end of September 2016, including the major oil-producing countries. With this new contract, China’s largest oil suppliers will now be able to transact directly with China, and other oil importing countries, using yuan which are directly convertible into gold to settle the trade.
As Alasdair Macleod asserts, “It is a mechanism which is likely to appeal to oil producers that prefer to avoid using dollars, and are not ready to accept that being paid in yuan for oil sales to China is a good idea either.”
Since 1973, OPEC oil has been quoted and traded using to U.S. dollars, otherwise known as “petrodollars.” The “recycling” of petrodollars into U.S. Treasuries has been the life-blood of the U.S. economic and political system. In addition to reducing a major source of funding for the the U.S. Government’s enormous deficit spending, the introduction of a gold-backed yuan oil futures contract is an important step toward removing the dollar as the world’s reserve currency. More significantly it reintroduces gold into the global monetary system.
While the new gold-backed “petroyuan” will allow oil producers to sell oil for gold rather than Treasuries. Furthermore, it reduces the ability of the U.S. Government to impose its will on the rest of the world. It’s a strategic step toward not only ridding the world of its dependence on dollars, but also of reducing the ability of the U.S. to exert global economic and financially tyranny. I would also argue that it’s one of the primary reasons behind the inability of the western Central Banks to drive the price of gold lower recently.
Read more on this topic: If the US Dollar Was Again Linked to Gold, How Would This Affect New Zealand? >>