Oil For Gold – Real Or Imagined?

By having control of the physical market for gold, China can threaten to use it to destabilize the dollar, without destabilizing the yuan. As such, it is potentially devastating, and used carelessly could trigger an economic collapse in Western capital markets, wreaking financial and economic havoc in America and other advanced nations. China will never be wholly independent from trade with these nations, and severe financial and economic damage to the advanced economies will rebound upon her to some extent. For this reason, she has so far held off using gold as an economic and financial weapon, while she continues to insulate herself from periodic crises in Western economies.   – Alasdair Macleod (Oil For Gold)

In response to questions about when China would finally cast aside the dollar and run the price of gold up, I’ve always replied that China would be shooting itself in the foot if it tried to replace the dollar too quickly.  Don’t forget, China holds about $1.2 trillion in the form of Treasuries. Note: this ratio does not include the market value of its gold holdings, the actual amount of which is unknown outside of a small circle of Chinese officials.

When the idea of a gold-backed yuan-denominated oil futures contract surfaced, it became en vogue for those unable to analyze their way  out of a paper bag to issue commentary refuting the idea.  For some, if an event has not already occurred, they are unable to “see” it.

This article from Alasdair Macleod is a must-read for anyone who wants to understand the path leading up to the ability to convert oil sold in yuan or gold by China’s largest oil suppliers.  Judging by the various recent oil trading and gold trading agreements between Russia and China, the conversion of oil sales into gold  may well be already occurring in a two-stage process between Russia and China.

The purpose of this article is to put the proposed oil for yuan contract, which has been planned for some time, into its proper context. It requires knowledge of the history of how China’s policy of internationalising the yuan has been developed, and will be brought up to date with an analysis of how the partnership of China and Russia is taking over as the dominant power over the Eurasian land-mass, a story that is now extending to the Middle East. To read the rest click here: Oil For Gold – Macleod

While Alasdair does not overtly acknowledge the idea of a gold-backed oil contract coming from China, I would argue that the article about a gold-yuan oil futures contract  in the Nikkei Asian Review – a highly regarded publication – was likely floated intentionally by the Chinese Government. If you read through Alasdair’s article, it’s difficult not to come away with the impression that China has been methodically and patiently putting together the pieces to support the ability to convert oil sold China – benchmarked by the yuan – ultimately into gold.

Yes, the fact that China does not currently permit gold to be removed from China in large quantities needs to be addressed.  Analysts using this to refute the oil/yuan/gold notion seem to conveniently overlook the fact that regulations can be revised.  I would suggest that “footprints in the snow” are leading to this eventuality. It’s now possible to sell oil to China in dollars or rubles or rials then  convert the proceeds into offshore yuan and buy gold in China’s Free Trade Zone.  As Alasdair himself points out:  “Gold futures contracts in yuan are now available to international dealers in Hong Kong and Dubai using the SGE gold price as benchmark.”

Furthermore, the Commercial Bank of China (State-owned) is the sponsor of a gold futures contract offered by the London Metals Exchange.  Seems pretty obvious that an oil seller can ultimately convert the proceeds of oil sold to China into gold using three transactions.  Why not consolidate that process into one contract?  I would suggest that a gold-backed yuan-denominated oil futures contract is inevitable.  Just maybe not one the timeline preferred by the western gold investing community.

12 thoughts on “Oil For Gold – Real Or Imagined?

    1. Generally, gold-backed means the ability to exchange paper for gold. I guess those familiar with the history of monetary systems already know this. For instance, the Bretton Woods agreement established the dollar as the reserve currency because the U.S. agree to back Treasuries issued to foreign buyers with gold. This meant that the owner of these Treasuries could exchange that paper for gold from the Fed.

  1. Hmmmm, 1.2 trillion in treasuries equates to around 28,000 tons of gold, compared to the theoretical 20000 tons China is said to have on-hand. World-total amnt of gold is somewhere around 150,000-170,000 tons (a combination of bullion and all other products), while Wikipedia says the top 40 governments that hold it only total up to around 31000 tons. If these figures are accurate, safe to say that a swing downward in treasury prices could easily make it dramatically more difficult to convert them into pre-refined bullion…as recycling gold from junk (such as electronics) is far less economical at current bullion prices. In order to avoid this, China either has to sell it’s treasuries well in advance of their demise, pump up treasury prices, force the PMs even lower, or a combination of the above.

    Problem is, treasuries are already very overvalued, and the PMs have formed a great resistance level. Furthermore, it won’t be very long after treasuries crash for the FED to do what it does best…so China really does not have much time to play with, especially if gold plays catch-up before all his happens. That’s my two cents at least.

  2. Hey Administrator, I remember a few weeks + back when it came out the Chinese had structured the contract so that it would not settle with Chinese gold (Shanghi anyway). The futures moved the physical liability to the London Gold Exchange. (that’s my understanding but what do I know) I remember at first being pissed they were doing that then it sunk in they were transferring the liability for the Phizz to the LBMA. H’mmm that was smart and a bit sneaky so the question remains will they press their case or just continue milking the status quo until the physical pipeline inventory is exhausted? Perhaps compounding the next round or just seeing how much more stupid cheap PM they can sweat out of the Cartel while they try to keep the Ponzi alive for a bit longer…. They to (China) are sitting on a financial bomb or two. At least that is what we hear so often relative to their debt… Its way beyond SiFi at this point what your best guess on the Chinese/Russian, Western, gold Kismet timing? What sez you?

  3. There was a link appended to Mr. Macleod’s article that gives great insight into the Chinese plan of reducing, if not eliminating altogether, the US dollar as the global reserve currency. It’s also interesting reading because the author, a Chinese general, explains how the world is financing US global military dominance through recycling of the petrodollar.

    I don’t think there is any question of the SCO’s intent to eliminate dollars for account settlement very soon. They’ve had 9 years to implement a new system and it’s pretty much complete – including a substitute for SWIFT.

    Mr. Macleod has also written about the Asian pivot theory of Halford Mackinder, which implies that controlling trade in this massive geographical and populated region of the world will confer global dominance to those in control ie. China et al. This also means establishing a new, independent means of providing collateral for trade, other than sovereign credit – gold.

    As an aside, a friend of mine attended Fidelity’s Investment conference this past weekend in LA. His comment was that although there were many concerns expressed about the markets, they were throwing around John Prince’s old line about how everyone has to dance while the music is playing. Although concerned about tail risk, what else can you do but keep partying. It’s deja vu all over again, as Yogi would say.

    1. famous last words there. Either you believe in a free lunch or you don’t. I don’t. There will be
      some unforeseen consequence(s) and everybody at the Fidelity conference is on the same side of the
      boat when the consequence “missile” hits the boat. This boat will go down faster than the Titanic.

  4. Hi Dave,

    I studied this theme for around a decade now and I as far as I know, there has always been a gold for oil deal in the background. Back then, when the petro dollar was launched, do you really think Saudi Arabia, the most fundamental Muslim state on earth would say, sure, we do it and ask nothing in return even though fiat (thus interest) goes against their most valued principles? Them knowing fully that paper currency will hit its intrinsic value being 0?

    A great example is this I quote (you can find the piece by searching coinweek and adding gold disks since your site does not allow for links)

    ”In the 1950’s, numismatists were puzzled by these “discs” until-in 1957 – the story emerged in The Numismatist. Aramco, required to pay royalties and other payments in gold to the Saudi government, could not obtain the gold at the monetary price fixed by the United States so the U. S. government specifically began to mint the “discs” – actually bullion in coin form for these payments. In 1945, for example, the mint turned out 91,210 large discs worth $20, and, in 1947,121,364 small discs worth $5, according to The Numismatist.”

    ”For a time the Saudis accepted payment in United States currency, but by 1945 they were insisting that the payments in gold be resumed. Aramco sought help from the United States Government. Faced with the prospect of either a cutoff of substantial amounts of Middle Eastern oil or a huge increase in the price of Saudi crude, the Government minted 91,120 large gold disks adorned with the American eagle and the words “U.S. Mint — Philadelphia.”

    Back then, Saudi Arabia was the main player in the oil market. The wars in the middle east are for one thing only! Keep that damn oil in the ground and not let it flow. Keeping a shortage of oil, thus demand for the petro dollar alive since all them countries wanted a piece of the cake Sauri Arabia and America have.

    Thats why its so revolutionary that China and Russia now do formal gold, oil and own currency trades. Iran to a lesser extend. But Iam sure that will change soon. Want to know where South Africa her gold in the ground that was mined went? Now you know and no, the Arabs are not in London in mass for the fine weather (smile).

    As I see it, China, Russia and many others (like the EU who set up the monetary paradigma shift) are now basically telling Saudi Arabia, deal with it, the gold you get for your oil will be lots less per barrel so all other major net oil producers will also get gold. If they are net exporters.

    I cannot stress enough the importance of the introduction of the Euro. As a Dutchman I love the Euro is issued / valued based on a (not so free now) goldprice instead of the Dollar. The whole Eurasian landmass now does that. Only last year did China switch to that model. Before that they issued currency based on the Dollar.

    Once Saudi Arabia switches to accepting Yuan and maybe other currencies then Dollars for their oil, my bet is that the game is on to dethrone the dollar. Dont mind the silly talk about the SDR, bitcoin and yes, silver as well, gold is the so called focal point (look into that concept if you dont know it).

    Just as the stockmarket etc now is absorbing the inflation, gold will do as good (or bad depending on your RL experiences now) absorbing it. The rest of the world (as in not America) is already busy for decades now to implement a new concept of what money is for decades now. On the central bank level (inc BIS) all is in place. Now the west has to learn, fiat is for spending, gold for saving. Solves so many issues including quite some reasons for war.

    Money (better said currency) is debt, its true, think about it hard. But if you save that debt you make it impossible to let the person, region, country even continent pay that back. So it set up communities, countries and even continents up against eachother. Debtor vs the saver in short.

    If you have the reserve currency, its even worse. Then you have what is called the triffin dilemma. Your currency is always over valued and because you have to have a big trade defict. President Trump says lower the exchange rate. I hope and think he knows that wont work. The only thing that can make america great again work be tons of pain and then produce stuiff people all over the world want.

    Thats why the world is issuing their currency from a free floating gold price. No one can manipulate physical gold. Crypto? Please. Spare me that. Fun fact, in Holland and all of EUrope (and I truely dislike the EU) we have one, yes only one item, you can buy at 0% VAT.

    Regards, Hugo

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