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Gold-Backed, Yuan-Denominated Oil Futures Could Dethrone US Petrodollar

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A recent move by China could take a big step toward dethroning the US petrodollar.

The Chinese have announced the launch of a gold-backed, yuan-denominated oil futures contract. The move potentially creates a way for oil exporters to circumvent US dollar denominated benchmarks by trading in yuan. The contracts will be priced in yuan, but convertible to gold. An article in the Nikki Asian Review explains the significance of the move.

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 US dollars. China’s move will allow exporters such as Russia and Iran to circumvent US 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 stability of gold is the key to China’s drive to dethrone the petrodollar.

In June, China took the first step toward establishing a “petroyuan” when it launched a direct trade relationship with Russia, allowing oil purchases to be made strictly in the Chinese currency. But China faces hurdles as it tries to establish similar relationships with other oil exporters. The yuan is still widely viewed as unstable and illiquid. Allowing holders to convert oil contracts to gold solves this problem.  As Alasdair Macleod, head of research at Goldmoney, told the Asian Review, including an option to have the contract paid in physical gold will ease some of the wariness oil exporters have about the yuan.

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.”

Vulpes Investment Management adviser Grant Williams told the Asian Review he thinks a lot of exporters will be happy to trade oil 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 US Treasuries, which can be printed out of thin air.”

A successful gold-backed Chinese petroyuan could be bad news for the US dollar and for the broader US economy. As an article in NewsMax points out, the dollar’s strength is highly dependent on its use as an oil-trade vehicle. If the yuan begins to undermine the dollar’s position, we could see a steady decline in the greenback. It could also further expand the debt bubble.

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 US government could soon find itself shouldering an even bigger debt burden than it already is.”

This comes at a time when the dollar is already weakening significantly. August was another down month for the greenback. After a post-election surge, the dollar has tanked, dropping six months in a row. It’s currently on pace for its worst year since 1985. In a recent interview on RT’s Boom Bust, Peter Schiff said he thinks the weakening dollar is a big factor in the rise in the price of gold.

People are not buying gold because they need a safe haven, at least not from a geopolitical event. I think they’re buying gold to get out of the US dollar.”

If the Chinese gold-backed, yuan-denominated oil futures contracts prove successful, it could push gold even higher as the petroyuan further erodes the strength of the dollar. And as NewsMax reported, the Chinese move is significant for gold in a more basic sense.

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.”

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