Gold-backed petro-yuan could be a game changer for the dollar
Between uncontrolled spending, loose monetary policy and out of control borrowing the US government has continuously strained its own currency - and they’ve been doing it for decades! Every newly created dollar the Federal Reserve puts out into the banking system builds the avalanche of inflation a little taller and more wobbly.
Will this latest move by China be the card that brings the dollar down?
With $20 trillion in debt, several times that in unfunded liabilities, a Fed balance sheet expanded beyond all reason, prices for everything should be much higher. After this kind of quantitative easing, the dollar continues to have less purchasing power.
Do the rules of mathematics, economics and finance just not apply to the U.S. dollar?
They do, but there is a critical dynamic in place that most people overlook or underestimate. We see little noticeable inflation in the general economy, but the truth is SOMETHING is holding all that inflation back.
The world does oil transactions in U.S. Dollars
The petrodollar agreement brokered by Nixon supports demand for the US dollar more than most people realize. The fact that global oil contracts are settled almost exclusively in dollars means that every country in the world needs our currency if they want to import oil.
Do you think that props up demand and allows us to export our inflation? You bet it does.
Do you think that might also make some other countries a tad resentful? You bet it does.
These days if we put sanctions on a country and starve them of dollars we are also starving them of oil. This power of the purse gives us tremendous influence over other countries. Without access to U.S. dollars they are backed into a very small corner for sourcing or selling oil.
But that corner cannot stay so small forever.
Our government will not give up its dollar dominance without a fight. Previously we’ve beaten back currency threats from Hussein and Ghaddafi, but the threats continue. In 2014 Russia and Iran brokered an oil-for-goods deal that severely strained international relations. That deal was only for $20 billion.
Last June, Russia and China established a direct trade agreement for oil in yuan. China wanted a similar deal with the Saudis, but negotiations failed.
This latest salvo from China would be widespread, ongoing and game-changing if it proves successful.
China finally won inclusion for the yuan in the IMF’s “Special Drawing Rights” basket of currencies, and now, to bolster the power of the “petroyuan” they have announced a new oil futures contract, denominated in yuan and convertible into gold.
Gold is Key
The yuan is still an emerging currency, thus, simply trading yuan for oil would not have worked on a larger scale. Fiat currencies the world over are still just instruments of government debt, after all. Adding the stability of gold to the deal could be China’s checkmate to US dollar supremacy.
What will this mean?
This new futures contract could prove popular to the sectors of the global economy that are chafing under so much US control. Having somewhere else to go could not only weaken demand for the dollar globally, but could have a big impact on diplomatic relations.
Critically for investors, this is tremendously dollar-negative and gold-positive. Backing trades in gold will create a surge in demand for gold in much the same way there is now demand for the dollar. The demand for dollars will be traded for demand for gold and yuan. The dollar will be that much less useful and desirable in the world marketplace.
Not only that, but consider that avalanche of inflation that has been building. We will have less ability to export that debt onto oil-thirsty foreigners. This could be the game-changer that eventually leaves you spending significantly more for goods and strikes a blow to your dollar denominated portfolio.
Never has the future looked so bullish for gold on so many fronts. It is time to take action to defend your portfolio from this recent move from China.
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