Gold Will Soar... As China Kneecaps The Dollar
by Tyler Durden Dec 13, 2017
Chris Lowe: To catch up real quick, why is the petrodollar at risk?
Nick Giambruno: Under the current petrodollar system, all global oil sales are made in dollars. However, the Chinese government recently announced a new mechanism that will allow oil producers anywhere in the world to trade oil for gold.
China’s new mechanism will totally bypass the US dollar and the US financial system… along with any restrictions, regulations, or sanctions from Washington. So for many oil producers, it will be much more attractive than the petrodollar system.
I call it China’s “golden alternative” to the petrodollar. Whatever you call it, though, it will allow for the large-scale trade of oil for gold, instead of dollars.
Here’s how it will work. The Shanghai International Energy Exchange is launching a crude-oil futures contract denominated in yuan, China’s currency. This will allow oil producers around the world to sell their oil for yuan.
Of course, the yuan is a fiat currency, just like the dollar. And most oil producers don’t want large stashes of yuan. The Chinese government knows this. That’s why it’s linked the crude-oil futures contract with the option to efficiently convert yuan into physical gold through gold exchanges in Shanghai and Hong Kong.
Chris Lowe: How soon will this new system be up and running?
Nick Giambruno: I spoke with officials at the Shanghai International Energy Exchange. They told me they plan to go live with it before the end of the year, or shortly thereafter.
Chris Lowe: But isn’t that a good thing? Isn’t gold, as a currency, more reliable than the dollar?
Nick Giambruno: I think it’s high time gold played a more central role in the global monetary system. The problem is ditching the petrodollar would negatively affect the US economy.
Think about it. If Italy wants to buy oil from Kuwait… or Argentina wants to buy oil from Brazil… they have to buy dollars on the foreign exchange market first.
This creates a huge artificial market for dollars.
It means the US can simply print dollars and exchange them for real things like French wine, Italian cars, Korean electronics, or Chinese manufactured goods.
It also helps create a deeper, more liquid market for US Treasury bonds. This pushes up prices… and pushes down yields… which allows the US federal government to finance enormous and permanent deficits.
The petrodollar has allowed Washington to spend astronomical amounts of money on welfare and other benefits for over half the population. This gives Americans a much higher standard of living than they would have otherwise. Most of them don’t know this or understand how it affects their everyday lives.
http://www.zerohedge.com/news/2017-12-13/gold-will-soar-china-kneecaps-dollar
