Sounds like the gold market is needing a little boost and therefore this is the perfect storm...who is going to lose and who is going to win-win?
How China Just 'Reset' the Global Monetary System With Gold
By Peter Reagan
Saturday, 09 Sep 2017 12:08 AMCurrent | Bio | Archive
China is taking the next big step towards dethroning the dollar’s place as the number one reserve currency around the world. But the strategy behind this big move could send gold soaring.
International oil trade is the crux of the issue. For decades, the world’s largest oil importers have paid for oil using the petrodollar, which supports the dollar’s value and fuels U.S. government deficit spending (primarily because the petrodollar is backed by Treasuries).
But now, China is looking to upset the current petrodollar system by introducing gold-backed “petroyuan” oil futures contracts. And since China is the largest importer of oil globally, this massive shift away from the petrodollar could be bad news for the U.S. But it could be great news for gold owners. Here’s why…
Building the Petroyuan
In June, China took the first step towards overturning the petrodollar by establishing a direct-trade relationship with Russia allowing for oil purchases to be made strictly in yuan. And just like that, the petroyuan was born.
Not long after China’s new deal with Russia, Chinese officials began negotiations for a similar agreement with Saudi Arabia. But the discussion didn’t flow as smoothly as it did with Russia.
That’s why China is taking things one step further with these new gold-backed futures contracts...
Gold Solves Petroyuan Concerns
Russia welcomed the petroyuan with open arms. But other big oil exporters haven’t been as keen to embrace it. Despite rising concerns around the U.S. dollar’s stability and viability, the yuan is still too illiquid and unestablished globally in comparison, causing many exporters to shy away from accepting it.
But China has an ingenious way to solve this problem: Simply back the petroyuan with gold.
By introducing these new petroyuan oil futures contracts that are convertible to gold, China is effectively negating exporters’ fears of accepting the yuan as trade payment. Gold holds a significant draw for exporters over the yuan alone, and these new contracts are opening the door for the petrodollar to be overturned… permanently.
The Nikkei Asian Review reports:
Grant Williams, an adviser to Vulpes Investment Management, a Singapore-based hedge fund sponsor, said he expects most oil producers to be happy to exchange their oil reserves for gold. "It's a transfer of holding their assets in black liquid to yellow metal. It's a strategic move swapping oil for gold, rather than for U.S. Treasuries, which can be printed out of thin air," he said.
Good News & Bad News
Depending on how your savings are invested, China’s new gold-backed petroyuan futures contracts could either be good news or bad news. Let’s get the bad news over with first…
With major oil exporters finally having a viable way to circumvent the petrodollar system, the U.S. economy could soon encounter severely troubled waters.
First of all, the dollar’s value depends massively on its use as an oil trade vehicle. When that goes away, we will likely see a strong and steady decline in the dollar’s value.
Second, the U.S. government relies heavily on the geopolitical bargaining power and benefits provided by the petrodollar system. Since the petrodollar is backed by Treasuries, the federal government depends heavily on it to fund deficit spending. Without the monetary support of the petrodollar, the U.S. government could soon find itself shouldering an even bigger debt burden than it already is (not to mention lawmakers’ current budgetary struggles and the approaching need for another debt ceiling increase).
But there are still very good news…
While the dollar and U.S. government brace for the crushing impact of China’s new game-changing oil trade instrument, there’s one asset that could benefit handsomely from this situation, and that’s physical gold.
For the first time since our nation abandoned the gold standard decades ago, physical gold is being reintroduced to the global monetary system in a major way. That alone is incredibly good news for gold owners. But that’s not all…
Think of it like this: Given the choice between trading in something backed by Treasuries (which can be created at-will from nothing by the U.S. government) or physical gold, what do you think exporters will prefer?
Not much of a question, the choice for gold-backed instruments over Treasury-backed is kind of a no-brainer…
As more and more nations pile into this new gold-backed oil trade instrument, global demand for physical gold will surge, giving gold prices a tremendous upward thrust.
China plans to launch yuan gold fix by end of 2015
By A. Ananthalakshmi
SHANGHAI (Reuters) - China plans to launch a yuan-denominated gold fix by the end of 2015 via the Shanghai Gold Exchange (SGE), in a move aimed at giving the world's biggest bullion producer and consumer more influence over pricing.
The first public confirmation made by an exchange official comes after Reuters cited sources in February on the proposal for the fix to be set through trading on the SGE, the world's biggest physical bullion exchange.
"We will be introducing a renminbi-denominated fix at the right moment, we are hoping to introduce by the end of the year," Shen Gang, SGE's vice president, said at the LBMA Bullion Market Forum in Shanghai on Thursday.
Shen did not give more details, but sources familiar with the matter have said that China is expected to receive central bank approval for the fix soon.
Pan Gongsheng, a deputy governor of the People's Bank of China (PBOC), said the bank would continue to support "speedy and healthy growth of the China gold market" and its internationalisation.
Given its leading role in gold, China feels it is entitled to be a price-setter for bullion and is asserting itself at a time when the global benchmark, the century-old London fix, is under scrutiny for alleged price-manipulation.
If the yuan fix takes off, China could compel local buyers and foreign suppliers to pay the domestic yuan price, making the London fix less relevant in the world's biggest bullion market.
However, given the yuan is not fully convertible, the two benchmarks could exist side-by-side globally.
China has been making efforts to liberalise the yuan and increase its influence in global gold markets. The Bank of China recently joined the London gold price benchmarking process, the first Chinese bank to do so, while the Industrial and Commercial Bank of China Ltd said it too was keen to join the process.
These banks could also join China's yuan gold fix.
The SGE has submitted details of the fixing process, and rules and regulations for participants, to the PBOC a few weeks ago, sources familiar with the matter said.
"They may approve it anytime now," said one source, who declined to be named because of rules on talking to media.
FOREIGN BANKS EYED
After receiving PBOC approval, SGE will work to sign up Chinese and foreign banks. Around 15 Chinese banks are expected to participate initially, the source said.
But the yuan fix's success will depend on the participation of foreign banks, which may be reluctant to join given the global scrutiny of benchmarks following the manipulation of the London interbank offered rate.
"It will be hard to join the fix because there are lots of internal compliance issues. It might take months before we get everything done in house," said a trader from a global bullion bank.
In a trial run for the fix in April, some foreign banks participated along with many major Chinese banks.
Details of the fix are yet to be revealed, but sources say it would be derived from a contract traded on the bourse for a few minutes, with the SGE acting as the central counterparty. That could make the process transparent - addressing one of the big concerns about the London fix.
The yuan fix is the most recent effort by SGE to boost China's position in the global gold market.
The exchange opened an international bourse in September 2014, allowing foreigners to trade yuan-denominated contracts for the first time. Australia and New Zealand Banking Group, Standard Chartered and HSBC are among the members of the bourse.
(Writing by Himani Sarkar; Editing by Ed Davies)