October 15 Post – The Gold-Backed-Oil-Yuan Futures Contract Myth

The Gold Antitrust Action Committee (GATA) forwarded this research article via their daily dispatches. It was written by Koos Jansen, and explains all the incorrect analysis on the Nikkei Asian Review’s article titled, China sees new world order with oil benchmark backed by gold.

I discussed this with you a couple weeks ago, and while I received a couple emails criticizing my analysis, I stand by every word I said.

“The Nikkei headline clearly reads “China sees new world order with oil benchmark backed by gold”. In this context, the word “backed” for most readers will refer to a fixed parity. In the past, for example, there was a fixed parity between gold and the US dollar; this meant the dollar was backed by gold through the US Treasury; dollars could be redeemed for gold at a fixed price and vice versa. In case of the Nikkei story it would imply a fixed parity between yuan, or oil (this is not clear), and gold. But how would China back anything with gold? Would China’s central bank (the PBOC) defend a fixed price of gold in yuan? And it would do so through an oil futures contract? Impossible.”

“Foreign enterprises, like oil producers, cannot hedge gold on the Shanghai Futures Exchange. The Shanghai Futures Exchange is not open for international customers. There is only a spot-deferred product listed on the Shanghai Gold Exchange, which is comparable to a futures contract, through which foreign enterprises can hedge gold in yuan. But why would oil producers buy gold and subsequently hedge the metal in yuan? Their end position would be merely exposure to the price of yuan. Why then not buy a yuan-denominated bond with an interest rate? Or hold gold without the hedge?”

“Quickly ‘the story’ by Nikkei transformed through the blogosphere where analysts suggested the gold in SGE vaults would back the yuan. The problem with this theory is that gold in SGE vaults, (i) isn’t owned by the Chinese government, and (ii) isn’t allowed to be exported from the Chinese domestic market (not very convenient for foreign oil producers). Then analysts suggested the gold in vaults of the Shanghai International Gold Exchange (SGEI) would do the job. But SGEI gold, (i) isn’t owned by the Chinese government either, and (ii) can only have been sourced in the international gold market, payed for with US dollars. So much for the oil-gold trade circumventing US dollars as presented by Nikkei.”

The Gold-Backed-Oil-Yuan Futures Contract Myth

It’s refreshing to see some real common-sense analysis with China and their supposed support of gold. Of course, other than with GATA there will be no corrections to the disinformation on the typical goldbug sites. The damage was done and many in the anti-dollar crowd are now more convinced than ever that China is converting the yuan to gold-backing.

This is why I say we need to be very careful from where we get our information sources. We cannot be given in to our confirmation biases. As tempting as it is to look at the US Fed and US dollar hegemony with scorn, other than war there is no way to get rid of the US dollar as the reserve currency. China doesn’t want this to change either as it is using their dollars to buy up valuable resources. There is still time left until war; China needs to spend all its dollars before the bombs start dropping.