In the financial world, China’s announcement of their intentions to create a new oil contract that would be denominated in Yuan, but convertible to gold is certainly one of the biggest bombshells for 2017. However, for this intended policy to get off the ground a major change would need to occur regarding the pricing of gold at the Shanghai Gold Exchange.
This is because the amount of oil traded each year far surpasses the amount of gold held by most central banks, and some analysts are now speculating that to pull off this contract scheme the price of gold would need to increase several times, with a round figure of around $13,000 per ounce.
Washington found itself on the sharp hooks of a dilemma…
Dramatically raise the price of gold to limit redemptions — and devalue the dollar in the process — or repudiate its commitments under Bretton Woods.
Dishonor, that is… or dishonor.
It chose dishonor.
To continue under the Bretton Woods monetary system would have meant that the U.S. would have been forced to raise the price of gold to an enormous figure in order to reduce the amount of gold payable to the Saudis to a tolerable level. But raising the dollar price of gold in that manner would have constituted a great devaluation of the dollar and collapsed its international prestige; that in turn would have ended the predominance of the U.S. as the No. 1 power in the world. The U.S. was not willing to accept that outcome. So Nixon “closed the gold window” on Aug. 15, 1971.
If China is willing to trade gold for oil under its latest plan, a similar dynamic enters play.
China takes aboard some 8 million barrels of oil a day.
That’s 2.92 billion barrels per year — nearly 3 billion in all.
But China holds only a few thousand metric tons of gold (officially about 1,850. Some estimate the true figure much higher).
You see the problem, of course.
China rapidly depletes its gold reserves if too many oil exporters choose to exchange yuan for gold.
If the plan’s to be sustainable at all, gold must rise — drastically — in order to balance the vast amounts of oil it’s supporting.
As Price explains, “To balance the mass of oil received by China against a limited amount of available gold… it will be necessary for gold to skyrocket upward in yuan terms and, necessarily, in dollar terms as well.”
Price crunched the numbers…
One ounce of gold (about $1,300) currently fetches 26 barrels of oil (about $50 per).
One barrel of oil is worth 1.196 grams of gold.
Price calls this ratio “an unsustainably low purchasing power of gold vis-a-vis oil.”
Only a drastically higher gold price would render the plan plausible.
How far would gold have to climb before the relationship was stable in Price’s estimate?
Ten times. Thus, Price arrives at a reasonable gold price:
$13,000 per ounce. – Daily Reckoning via Silver Doctors
This is why one alternative being projected is that this new Chinese oil for yuan for gold contract may only occur in the East, with oil trades in dollars remaining the standard in the West according to Dr. Jim Willie in a recent interview. However, another theory is that China would use London as their primary source for gold, and this will lead to an increased depletion of the metal from Western vaults.
Source: The Daily Economist