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The Petroyuan Is For Real

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Late last month, China finally launched its much anticipated yuan-denominated oil futures contract. Many analysts think this is yet another sign that the mighty dollar’s world dominance is coming to an end.

The yuan-based oil contracts were a long time coming with several announcements and false starts over the last 10 years. The launch was reportedly a success with well over 23,000 contracts traded within the first hour for a notional trading volume of over 10 billion yuan.

As ZeroHedge put it, “the ‘petroyuan’ is now real and China will set out to challenge the ‘petrodollar’ for dominance.”

Many question the viability of yuan-denominated oil contracts because of the currency’s volatility. Last fall, the Chinese announced the launch of a gold-backed, yuan-denominated oil futures contract.  These contracts would be priced in yuan, but convertible to gold.

But if early trading serves as any indication, the Chinese may not even have to go to the gold-backed contracts. As the world’s leading importer of oil, it has significant clout in the market. As ZeroHedge reported, “Beijing can exert some real leverage over Saudi Arabia to pay for crude in yuan.”

That’s not good news for the dollar.

With major oil exporters finally having a viable way to circumvent the petrodollar system, the US 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.”

Or as an article at the Gold Telegraph starkly put it, “the rise of the petroyuan could be the death blow for the dollar.”

China, Russia and even Turkey have been working to free themselves from dependence on the dollar. But if the dollar is eventually toppled from its throne, it won’t likely happen in a sudden coup. More likely, its power will simply erode and it will eventually become irrelevant on the world stage.

The concern is the dollar’s value will wilt on the world stage. Its value has already declined significantly at home, as the Gold Telegraph pointed out.

The dollar has decreased 30% in purchasing power since 2000. It has lost 96% of its value since 1913. On an average, the US is devalued by 50% every generation.

Enter gold.

It’s no coincidence that countries like China, Russia and Turkey – countries seeking to untangle themselves from the dollar – have been the ones buying gold. Gold provides stability, whether for oil contracts or currencies in general. The yellow metal is a key to economic independence for countries looking to minimize the risk posed by the US fiat currency and to shake off the influence of foreign governments. As the Gold Telegraph put it, “In bettor’s terms, gold is the last ace in the hole for global currency stability.”

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