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LAWRIE WILLIAMS: China’s gold-for-oil threat to petrodollar

China has recently taken aim at the U.S. petrodollar by announcing a system for paying for imported Arab oil in Chinese yuan which would then be convertible into gold on a Chinese gold exchange. As pointed out by Mike Gleason of Money Metals Exchange in the U.S. this would enable China and its trading partners to bypass the dollar using a common monetary standard.

Mike goes on to comment that “The rise of a “petroyuan” could become the biggest threat to the U.S. dollar’s status as the world reserve currency. China’s appetite for imported oil is enormous and growing. So it makes sense for the country to seek direct trade deals with Saudi Arabia, Russia, and other suppliers.  For its part, Russia is all too willing to deal in gold. Russian officials view the monetary metal as integral in combating international economic sanctions and supporting the ruble.”

Even though the United States is no longer on a gold standard, it still holds what is believed to be the world’s largest gold stockpile. Recently, the U.S. Treasury Secretary Steven Mnuchin reportedly did a spot-check on Fort Knox for PR purposes and claims that America’s gold is safe. However how an individual’s ‘spot check’ cold confirm this is very much open to doubt and with no true audit of Fort Knox in more than 60 years, many such doubts remain about who actually holds title to all the gold bars and whether some may be counterfeit, leased out, or just plain missing.

Gleason also notes that “If [U.S.] citizens were allowed to redeem their dollars for gold or silver coins on demand, then nobody would have to take the government’s promises on faith. Of course, there was a time when U.S. currency explicitly stated it was redeemable in precious metal.  It’s a history most people today know little about. Those who were around as recently as 1963 may remember when paper dollars were also silver certificates – redeeemable in silver coins.

“Most politicians, bankers, and business titans today quite prefer digital dollars redeemable in nothing. They would prefer the public to not be tangibly connected to its history. There is a war on cash, a war on gold, and a war on history being waged in this country. They all go hand in hand.”

China’s motives here are worth examining.  The country is again believed to be building its gold reserves without reporting them to the IMF.  Indeed its gold reserves are believed by many observers to be very considerably higher than the reported total of 1,842.6 tonnes in any case –see: The fiction in Chinese gold reserves and media import coverage.  Building its gold reserves can be seen as both a move to diversify its foreign exchange holdings away from their current U.S. dollar-related dominance given China sees the dollar as a weak currency given the enormous U.S. debt situation, but also to build up sufficient gold stocks to be able to use them to convert petro-yuan into gold, which would be a popular option for most oil exporting nations – notably Russia, the Middle Eastern oil producers and perhaps Venezuela.

While China has stated that it doesn’t have plans for the yuan to replace the dollar as the global reserve currency, it has seen the many trade benefits which have accrued to the U.S. from the dollar’s dominance and, with the acceptance of the yuan as an integral component of the IMF’s Special Drawing Right (SDR), it has already been able to take the first such step in this direction whether denied or not.  The implementation of a ‘petro-yuan’, particularly if redeemable in gold,  would be another major step.

While the dollar will almost certainly still remain the worlds’ primary reserve currency for a few years yet, the questin has to be when, not if, the yuan will come to dominate world trade?

24 Oct 2017

About the author

Lawrence Williams

Lawrence (Lawrie) Williams is a well known London-based writer and commentator on financial and political subjects, but specialising in precious metals news and commentary. He is a qualified and experienced mining engineer having graduated in mining engineering from The Royal School of Mines, a constituent college of Imperial College, London – recently described as the World’s No. 2 University (after MIT).

e: lawrie.williams@sharpspixley.com

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