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China resets global monetary system

From Birch Gold Group

China is taking the next big step towards dethroning the dollar’s place as the number one reserve currency around the world. But the strategy behind this big move could send gold soaring.

International oil trade is the crux of the issue. For decades, the world’s largest oil importers have paid for oil using the petrodollar, which supports the dollar’s value and fuels U.S. government deficit spending (primarily because the petrodollar is backed by Treasuries).

But now, China is looking to upset the current petrodollar system by introducing gold-backed “petroyuan” oil futures contracts. And since China is the largest importer of oil globally, this massive shift away from the petrodollar could be bad news for the U.S. But it could be great news for gold owners. Here’s why…

Building the Petroyuan

In June, China took the first step towards overturning the petrodollar by establishing a direct-trade relationship with Russia allowing for oil purchases to be made strictly in yuan. And just like that, the petroyuan was born.

Not long after China’s new deal with Russia, Chinese officials began negotiations for a similar agreement with Saudi Arabia. But the discussion didn’t flow as smoothly as it did with Russia.

That’s why China is taking things one step further with these new gold-backed futures contracts…

Gold Solves Petroyuan Concerns

Russia welcomed the petroyuan with open arms. But other big oil exporters haven’t been as keen to embrace it. Despite rising concerns around the U.S. dollar’s stability and viability, the yuan is still too illiquid and unestablished globally in comparison, causing many exporters to shy away from accepting it.

But China has an ingenious way to solve this problem: Simply back the petroyuan with gold.

By introducing these new petroyuan oil futures contracts that are convertible to gold, China is effectively negating exporters’ fears of accepting the yuan as trade payment. Gold holds a significant draw for exporters over the yuan alone, and these new contracts are opening the door for the petrodollar to be overturned… permanently.

The Nikkei Asian Review reports:

Grant Williams, an adviser to Vulpes Investment Management, a Singapore-based hedge fund sponsor, said he expects most oil producers to be happy to exchange their oil reserves 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 U.S. Treasuries, which can be printed out of thin air,” he said.

Good News & Bad News

Depending on how your savings are invested, China’s new gold-backed petroyuan futures contracts could either be good news or bad news. Let’s get the bad news over with first…

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

Second, the U.S. government relies heavily on the geopolitical bargaining power and benefits provided by the petrodollar system. 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 U.S. government could soon find itself shouldering an even bigger debt burden than it already is (not to mention lawmakers’ current budgetary struggles and the approaching need for another debt ceiling increase).

But there are still very good news…

While the dollar and U.S. government brace for the crushing impact of China’s new game-changing oil trade instrument, there’s one asset that could benefit handsomely from this situation, and that’s physical gold.

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. But that’s not all…

Think of it like this: Given the choice between trading in something backed by Treasuries (which can be created at-will from nothing by the U.S. government) or physical gold, what do you think exporters will prefer?

Not much of a question, the choice for gold-backed instruments over Treasury-backed is kind of a no-brainer…

As more and more nations pile into this new gold-backed oil trade instrument, global demand for physical gold will surge, giving gold prices a tremendous upward thrust.

All this is coming at a time when gold already has several bullish price drivers poised to drive it higher… China’s new gold-backed oil futures contracts are just icing on the cake.

  • Harold Horwich

    If President Trump puts the dollar back on the gold standard if we have the gold to do this I believe gold would go through the roof?

  • Eric Daniels

    There is more dollars in circulation right now then all the gold in the world that is impossible to do today.

  • Gijo Vijayan

    This move will affect US dollar a lot,countries will start trading oil with China in gold backed YUAN, leaving dollar and dollar value will reduce. At the end of January 2016, CHINA foreign reserve stood at US$3.23 trillion. As dollar value reduce, Chinese foreign exchange reserve will also get wiped out, trillions of dollars of China reserves can go up in smoke. There are only 2 ways US can engage, either back US dollars with gold or threaten countries who trade in gold backed yuan with sanctions. US must stop spending trillions of dollars in war and it made itself weak. An economic turmoil in USA will affect all nations.

  • Perhaps? What is when China sets the gold price equal to, say, $300.00 USD? What prevents the lower gold price, rather than the higher gold price? I need to know WHY gold will be priced higher. A much lower gold price will be beneficial to China, because that low gold price will take the gold backed China currency to strength at about a $300.00 equivalent, perhaps?

  • You say China is on the move with it’s currency? Backed by gold? Ok. Now, when this is happening, perhaps there will be a point where the $USD will become irrelevant and therefore whatever price that $USD is at will not be part of the equations in gold value? When this happens, will gold price rise, or tumble? What say you?

  • Yes, very possible. However, China could play spoiler with a much lower gold price, leaving America with wishes and dreams only. Perhaps?

  • Yes. Gold is needed at about $10,000 an ounce to do this. Do you believe the world will allow this?

  • Rich Lancaster

    Is there enough Chinese gold to really back the huge amount of Petroyuan to be issued? Highly doubtful at any significant %.

  • Not_Easily_Impressed

    What percent of “savvy” traders think the USD is overvalued? vs. undervalued? I don’t know. So, if the U.S. somehow declares it will be the market maker for gold at $10,000 per ounce, who wins? and who loses? I don’t know that either but I think I would be better off if I had an ounce of physical gold in my wallet. If nothing else I could sell it and pay off some of my debts.

  • Not_Easily_Impressed

    Let’s just say China does as you say … the next thing that would happen is everybody starts buying gold from China and China ends up with even more US Treasuries and less physical gold. Do you really thing China is going to be the first mover?