Priced in Yuan and Convertible into Gold

I believe this news announced on Friday, September 1st in the Nikkei Asian Review is a real game changer. China is expected shortly, meaning between now and the end of the year, to launch a crude oil futures contract priced in yuan and convertible into gold. The contract could become the most important Asia-based crude oil benchmark, given that China is the world’s biggest oil importer. Crude oil is usually priced in relation to Brent or West Texas Intermediate futures; both denominated in U.S. dollars.

Most of China’s crude imports, which averaged around 7.6 million barrels a day in 2016, are bought on long-term contracts between China’s major oil companies and foreign national oil companies.

China’s move will allow exporters such as Russia and Iran to circumvent U.S. sanctions by trading in yuan. To further entice trade, China says the yuan will be fully convertible into gold on exchanges in Shanghai and Hong Kong.

The existence of yuan-backed oil and gold futures means that users will have the option of being paid in physical gold, said Alasdair Macleod, head of research at Goldmoney, a gold-based financial services company based in Toronto. “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,” Macleod said.

To understand the importance of this move, read what Investopedia wrote:

“After the collapse of the Bretton Woods gold standard in the early 1970s, the U.S. struck a deal with Saudi Arabia to standardize oil prices in dollar terms. Through this deal, the petrodollar system was born, along with a paradigm shift away from pegged exchanged rates and gold-backed currencies to non-backed, floating rate regimes.”

“The petrodollar system elevated the U.S. dollar to the world’s reserve currency and through this status, the U.S. is able to enjoy persistent trade deficits, and become a global economic hegemony. The petrodollar system also provides the United States’ financial markets with a source of liquidity and foreign capital inflows through petrodollar “recycling.”“

Now the hegemony of the dollar is threatened. Soon, oil contracts will be settled in Yuan and not just fiat Yuan, like the dollar backed by nothing, but Yuan convertible into gold.

Would you rather have Treasuries backed by less than 1.3% of gold or a yuan 100% backed by gold? The scary thing: the U.S. has used its military power to make war on countries who wanted to replace the dollar with some other currency. The U.S. has not allowed that. This chess game is nearing checkmate, and the U.S. may be on the losing side.

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