China Has Launched Its Gold-backed ‘Petroyuan’
$CNY, $USD, $USO, $OIL, $GLD
For the last few years, I have been writing about China’s coming Gold-backed ‘petroyuan’ and that it was imminent, few thought is possible.
On 26 March China launch an RMB Yuan-dominated Crude Oil futures contract, it had tried before, but, now the contract has gotten approval from China’s State Council.
The new petroyuan futures contracts began trading Monday morning, 26 March in China.
There was a flurry of trading activity just in the 1st hour.
“Well over 23,000 contracts have traded within the first hour for a notional trading volume of over 10-B RMB Yuan, that is more than US$1.5-B, signaling significant demand.
Up until early this past week people believed that the petroyuan would never happen. Or, if it did, that it would not gain traction with other countries.
But, as we see from the initial trading activity that there is a lot of demand for petroyuan.
The Big Q: Why the surprise?
The Big A: Russia and China have bypassed USD, and are trading Crude Oil directly in Chinese currency.
Now that RMB Yuan is backed by Gold and petroyuan futures contracts are trading in the open market, other countries will have no problem switching from USDs to the RMB Yuan to buy Crude Oil.
There is nothing the US Treasury can do about it, as the US does not have much leverage to force other countries to continue using the Buck to buy and sell Crude Oil.
This is because of the following 3 factors:
- The USD is not backed by Gold, the new petroyuan is. Since Gold’s value is universally recognized, it is an easy decision for countries to favor the petroyuan over USD.
- The US is no longer the world’s largest importer of Crude Oil, and has lost its ability to dictate the currency used to buy Crude Oil.
- New US tariffs are driving affected countries away from USDs and toward the Chinese petroyuan.
Regarding the timing of China’s new Crude Oil futures contract, is no coincidence.
Why?, because “fracking” and other technology have turbocharged US Crude Oil production, and last year China surpassed the United States last year as the world’s biggest importer of Crude Oil.
The contracts, denominated in RMB Yuan, can technically help China gain pricing power and internationalize CNY (Yuan), if a mature market with strong trading activities by global investors is set up.
And now has the leverage to dictate it own terms, and that require that it be able to purchase Crude Oil with its own currency.
There is no means for retaliation by the US, financial or otherwise, as would further damage the US and its interests. This means China is free to negotiate deals with other countries without fear of any US reprisals.
And now, Beijing can exert some real leverage over Saudi Arabia to pay for Crude Oil in RMB Yuan.
We now recognize that the petroyuan will grow to dominate the Crude Oil trade, ending the United States’ financial world dominance.
Notably, for more than 40 years, Washington, DC has ruled the global monetary roost by propping up Middle East dictators in exchange for those dictators pricing their Crude Oil in USDs. That system is coming to an end.
Economic and financial shock waves will follow.
The Gold-backed petroyuan may be good news for China, and bad news for the US, as the petrodollar is backed by US Treasuries, so it can help fuel US deficit spending. Take that away, the US is in trouble.
Simply put, US deficit spending will not be sustainable without the petrodollar. This may mean some serious financial pain as the US is forced to dramatically reduce government spending over the next few years.
This happening has created opportunity for Gold owners as the metal is finally being reintroduced to the global monetary system via the petroyuan. And is expected to increase both awareness and demand for Gold, offering a promising future for the precious Yellow metal that I have been calling for over the last few years.
Have a terrific Easter Weekend