China’s Oil Benchmark IS NOT Gold-Backed

Economics, Premium POM6 Comments

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.

Details matter.

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

This article is copyrighted by POM Media©2017. As Premium content permission is not given to be copied and re-posted.

JC Collins can be contacted at jcollins@philosophyofmetrics.com

6 Comments on “China’s Oil Benchmark IS NOT Gold-Backed”

  1. Thank you for confirming what I had discussed with Koos Jansen about week ago. I published the email conversation we had with some added commentary. Originally, I had been suckered into this nonsense but soon learned the errors of my ways. I am still under attack for peddling “fake news” by the very people one would think are seeking the truth and the facts. Apparently truth and facts are of no concern when someone is convinced of their stance.

    Thank you for being a voice of reason and supporting facts.

  2. Thanks for clarifying the details of that new oil contract JC. But while the transition from British Pound to USD may have taken 31 years, I do think this time it will happen quite a bit sooner. The global financial system is much more interlinked with near instantaneous communication, derivatives positions are huge (and never existed back then), and central banks are low on ammunition. Add in that the neocon war mongerers are mad as hatters, and their middle east Hubris is coming home to bite them. The Chinese banking system is very unbalanced with the massive credit creation of the last decade, and when it comes undone, I think they will unveil their true massive gold reserves.
    Our corporate and banking overlords are moving us to world socialism, and when the financial system next blows up, my guess is they will implement a Basic Living Income funded by Central Banks. The final step will be a new world reserve currency which is probably a basket of the major currencies, backed with gold and distributed with blockchain technology. I think it will all be in place sooner than decades – I think within the next 5 years. But that is just my 2 cents worth. Thanks for all your well rounded multidimensional thinking JC.

  3. SGX is metals only, no false paper promises
    Exchanging yuan or dollars or rubles or whatever on that exchange means that currency is as good as gold
    Thanks for what you do JC You have opened up a new frontier for me
    Griff

  4. “The Venezuelan Oil Ministry published a statement about the decision to publish prices in yuan, saying, “This format is the result of the announcement made on September 7 by the president [Maduro] … that Venezuela will implement new strategies to free the country from the tyranny of the dollar.””

    JC, you’ve already explained the misunderstanding about the conversion into gold and such but how does this Venezuelan spin play out? Its hard to see China doing business like this with the sanctions imposed on Venezuela but the world moves in ways I don’t always understand. I can see it being a lever to move the world away from the USD which plays into the script we have been watching unfold over these years. Can you shed a bit of light on it or is it just slander at this point?

    https://www.thetrumpet.com/16308-venezuela-publishes-oil-prices-in-chinese-yuan-snubbing-the-tyranny-of-the-dollar

  5. Value pegged to the dollar
    Value pegged to gold
    Value pegged to oil
    Trade is all of old

    Sharing is the is the value of trade
    Sharing is why it has to be done
    Sharing gives life
    Caring is the fun

    Trade makes the wheels go around
    Trade meshes the gears
    Trade is also the hound
    Causing the fears

    Who gets less
    Who gets more
    Who is pimp
    Why is there a whore

    We know who does the count
    We know who does the books
    We can barely read or write
    So we call them crooks

    Does their system not feed us
    Does our system not feed them
    Does their system allow mass slaughter
    Upon some kind of whim

    There is no life without system
    There is monkeys in the trees
    There is a system
    Take a bend on knee

    Rhythm is the system
    Rhythm the jazz of time
    Rhythm listen to your heart
    You got yours I got mine

    Time cannot be counted
    Time is not a thing
    Time is multi-dimensional
    Not music singing is the thing

    Math by it’s nature is a limit
    Math is hostage to it’s numbers
    Math when things don’t add up
    What a mind bending bummer

    Total what a meaningless word
    Total a method of construction
    Total of what
    Only to falsely describe destruction

    New multi-lateral world trade system
    New, good, bad, whatever
    New SDR budget balancer
    You got a better idea, forever
    Yours PTM

    who gets m
    who is the pimp
    Why the whore

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