The Oil For Gold-Backed Chinese Yuan Is Making The Rounds Again Today

“Petro-yuan” is making the rounds again in various mainstream and alternative media outlets. Here’s the latest on the story that refuses to go away…

Stemming from this Bloomberg released an interview with Adam Levinson discussing China’s plans to launch a yuan based crude oil contract:


It seems the gold-backing part of the contract is coming front and center.

Specifically, today, October 25th, Zero Hedge is pulling up analysis from over a month ago:

As Pepe Escobar recently noted, ‘to overcome the excessive domination of the limited number of reserve currencies’ is the politest way of stating what the BRICS have been discussing for years now; how to bypass the US dollar, as well as the petrodollar.

Beijing is ready to step up the game. Soon China will launch a crude oil futures contract priced in yuan. This means that Russia – as well as Iran, the other key node of Eurasia integration – may bypass US sanctions by trading energy in their own currencies, or in yuan. Inbuilt in the move is a true Chinese win-win; the yuan – according to some – will be fully convertible into gold on both the Shanghai and Hong Kong exchanges.

The new triad of oil, yuan and gold is actually a win-win-win. No problem at all if energy providers prefer to be paid in physical gold instead of yuan. The key message is the US dollar being bypassed.

China’s plans for oil futures trading go back more than two decades, with the government introducing a domestic crude contract in 1993 and stopping a year later amid an overhaul of its energy industry. But in 2013, we first hinted at the birth of the petroyuan was looming

In doing so China is effectively lobbing the first shot across the bow of the Petrodollar system, and more importantly, the key support of the USD in the international arena… setting the scene for the petroyuan.

And now, we are within two months of it becoming a reality as China prepares to roll out a yuan-denominated oil contract within the next two months…

“Approval of the trading rules by the securities regulator marks the clearance of a major hurdle toward launch of the contract,” Li Zhoulei, an analyst with Everbright Futures, said by phone.

“The latest rules raised entry threshold for investors from the draft rules, which shows the government wants to avoid volatility when it first starts trading.”

And this has caused Mish Shedlock to call out all the “silliness” of a gold-backed petroyuan:

Repeat after me: It’s meaningless what currency oil is quoted in. Once you understand the inherent truth in that statement, you immediately laugh at headlines like that presented on CNBC.

For those who do not understand the simple logic, consider the fact that one does not need to have dollars to buy oil. Currencies are fungible. In less than a second, and at ant time day or night, one can convert any currency to any other currency.

If countries want to hold dollars they can. If one wants to hold Swiss Francs, Euros, or Yen they can as well. Oil likely trades in all of those currencies right now.

Countries accumulate US dollars because the US runs a trade deficit, and those dollars will eventually return to the US.

Currency Requirements

If China wants to assume the role of having the world’s reserve currency, something I highly doubt actually, it will need to have a free-floating currency and the world’s largest bond market.

Not only does Mish call out the oil-for-anything madness, he gets right to the heart of the matter causing severe polarization in the precious metals community:

Mathematically, as long as China runs surpluses, foreign holding of yuan will not match foreign holding of dollars.

A mathematical corollary to having massive trade deficits year in and year is the need to have the world’s largest bond market.

Adding gold into the yuan-futures mix does not alter the picture other than to add costs.

Case Closed

The idea that the yuan will soon replace the dollar as the world’s reserve currency is absurd for currency reasons, political reasons, and economic reasons.

Two charts for consideration:

Regardless on where one stands on the whole “world reserve currency” thing, there is no denying that chart. Is the dollar long in the tooth?

Also, here’s a chart that has slipped out of the financial press, but the trend now appears clear:

While the Baltic Dry Index is not oil-for-yuan specific, it is telling us that just as oil has carved out a bottom over the last several years, so has shipping, and now, price inflation will be creeping in with every load coming into port.

Here’s something to think about: China is building relationships and constructing bi-lateral trade agreements around the globe. Economic activity (measured by the BDI) is beginning to pick up.

Here’s the question: Is it because the West is strong and full of economic activity, or because the East is moving forward in their role as up-and-commers?

Stack accordingly…