This article is about details.
The alternative media and precious metal pundits have been stampeding out articles about how oil producers can be paid in gold with China’s new oil futures benchmark. Most articles are titled “China’s Gold-Backed Futures Contract”, or some variation of that terminology.
The impression is being given that oil producers can accept gold for their energy exports. This is not correct.
Misrepresentation and lack of understanding run rampant when such assumptions and mischaracterizations happen. Perhaps some don’t fully understand the original communication about the oil futures contract, or are simply twisting the facts just enough to fit their own agenda.
Either way, details matter and facts are facts.
Allow me to explain.
China is implementing a yuan denominated crude benchmark. This will allow oil producers to accept renminbi for energy sales. For clarity, this does not allow them to directly sell oil for gold. The contracts can only be settled in renminbi, or yuan, using the unit of measurement terminology.
(For understanding purposes and for new readers who have not read back to the beginning of POM, renminbi is the name of the Chinese currency, while yuan is the unit of measurement. Think of the British sterling and its unit of measurement, the pound. This creates confusion in America because the name dollar is used in both situations.)
The second part of this mischaracterization has to do with the Shanghai Gold Exchange. The SGE has been changing gold for yuan since last year. The Hong Kong exchange is expected to begin doing the same sometime soon. Neither is directly connected to the new yuan oil contracts.
An oil producer could sell for yuan on the new Chinese benchmark and proceed to use that yuan to purchase gold on the SGE or through the Hong Kong exchange. But it would not be the one transaction as many are suggesting it would be.
No one would state that the West Texas benchmark is gold-backed just because the New York and London exchanges use the dollar. The same logic applies here.
This may seem like splitting hairs, but when we consider that the level of renminbi liquidity in the world is still only a fraction of what the USD liquidity is, we can begin to see through the smoke and mirrors of some commentators and analysts.
The very reason China is implementing a crude benchmark and adding the yuan to the gold exchanges is for the purpose of broadening its internationalization and increasing liquidity. There will be no massive shift which will see gold skyrocket to $10,000 and it will still take years for renminbi liquidity to come anywhere near the level of dollar liquidity.
Some nations will utilize the yuan crude benchmark and gold contacts for sure. That is the point of them. But the claims being made are disproportionate and add to the confusion of those who trust what they are reading and the sources who provided the information.
All of these changes are a part of the multilateral monetary transformation we have been learning about for years. It took from 1913 to 1944 before the USD finally replaced the British pound as the primary reserve currency. That is 31 years. We are only in the first decade of this transformation now. There will be periods where the pace picks up speed, and there will be periods where it seems like it slows down, but the progression from a unipolar framework to a multilateral framework will continue.
Getting excited about single transition pieces, and promoting those pieces as events signaling the end of the USD are foolish. Let’s keep our eyes on the facts and stay informed about the moving pieces. And every time you see the phrase “de-dollarization” being used, understand that it is more accurately described as “dollar diversification”. The dollar will still have a place in the international monetary system. Period. – JC
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JC Collins can be contacted at email@example.com