China has made an ambitious move towards competing against the petrodollar, by offering an alternative financial instrument. The Chinese government has announced their new Yuan oil futures contracts, backed by gold. This strong move by the Chinese virtually creates a path for oil exporters to bypass the standard route of trading in US Dollar benchmarks, and use the Yuan, with offering the option of purchases to be converted into gold.
Since China is the world’s largest importer of oil the deal could cause a major ripple in the global influence of the USD.
The contract is a very attractive alternative for oil exporting nations such as Iran, Russia, and Venezuela, allowing them to carry out sales in Yuan rather than the traditional USD, and then change their Yuan to gold on both the Shanghai and Hong Kong Stock exchange.
Crude Oil is normally priced linked to Brent or West Texas Intermediate futures, both in USD. China´s announcement of this option will permit some exporting nations to bypass US sanctions by trading in Yuan. The Chinese new futures contract makes trading very attractive for these countries by softening currency fears, and by making the Yuan currency fully transferable to gold. This will obviously open an international trading showdown, shaking the foundations of the petrodollar.
China in June started its first phase towards “Petroyuan” Launching a direct trade relationship with Russia.
Russia is allowing for all oil purchases to be made solely in Yuan. Shortly after Chinese officials began similar negotiations with Saudi Arabia. But the meeting didn’t go as smoothly as expected.
These negotations are still in progress, with China keeping its eyes wide open on Saudis state-owned Oil giant (Aramco) floating in 2018. Aramco is estimated to be worth $2tn when it lists. With only a 5% stake available. This potential access to shares in the Saudi Oil Giant could be key to China´s negotiations in the future.
Petrodollars & Gold Stability
The driving force is the stability of gold. This is key to China´s push to overthrow the petrodollar.
The dollar´s value is extremely dependant on its use as an oil trade vehicle. If and when that goes away, we will likely see a decline in the dollar value. While the dollar and U.S government stand ready for the bone shaking impact of China´s new trade instrument, the one asset that could benefit greatly from this situation is gold.
For the first time since the US abandoned the gold standard in 1971, physical gold is being reintroduced to the global monetary market. That in itself is excellent news for gold owners. The choice will be once again be between Treasuries and physical gold. Gold winning every time.
As the tide turns, more nations will pile into this new gold backed oil trading instrument, thus global demand for physical gold will rise, giving gold an extremely sharp boost in value.
In 2018 China will almost certainly be focusing on pushing their new financial trading instrument further around the globe, and concentrating on strengthening the Yuan, and most importantly for their clients “gold”.