While most of the financial world is paying attention to the U.S. stock market reaching another high, quietly, a major announcement came out of China that will put them on the global currency map like never before. China announced in September the creation of future Oil contracts, which will be open to international traders, and countries. What makes this historical move unique, is that payments will be made in their country’s currency, the Yuan, which is convertible to Gold. How does a country get their currency to compete with the U.S. Dollar? Simple, first set up their currency to be able to trade in the largest commodity in the world, Oil. Then, make those payments in the second largest traded commodity globally, Gold. This announcement is major because China has done just that! While this move provides the first official link between Oil and Gold, the stronger link is with the Chinese currency and Gold.
China’s Plans for the Yuan to Compete with the Dollar
At first the trades will be rather insignificant; however, over time as these trades gain momentum, the Yuan will not only compete with the U.S Dollar, but could dethrone the Dollar as the world’s reserve currency. This system that has been set up by China is no longer relying on the U.S. Dollar, rather an alternative way of buying Oil in another currency beside the Dollar. Meanwhile, President Trump is taking action to pursue the agenda of making America great again, which can include, at times, breaking economic agreements and stepping on other countries toes; moves that are leading America to be somewhat isolated. This changes the pathway that America has been recognized around the globe. As I have reported in previous newsletters, a growing number of countries have been moving away from holding dollars. Additionally, these countries have been selling U.S Treasuries at a record pace, according to a report put out by the Treasury almost a year ago. The benefits of holding the Dollar historically are now outweighed in holding other currencies or gold. A sell off in Dollars has a long term negative effects on our country.
While the situation with U.S. Dollar has played into the hands of China, their strategy started as early as the year 2000, when they announced they were going to become a global force in the financial markets. China, which thinks in terms of decades and legacies, has been patiently setting this up piece by piece to form the ultimate clear picture. While most of the world is playing checkers, China has been playing chess, strategically moving each piece into place.
How the Dollar became the World’s Reserve Currency
Before we describe that in detail let’s see how the Dollar got to be the world’s reserve currency. Post World War II, the United States became the world leader in every sense, economically, financially, and as a military leader. In 1944 The Bretton Woods Agreement was established. Bretton Woods refers to the international monetary arrangement, agreed upon by the allied nations in 1944 in Bretton Woods, US, that created the IMF and World Bank and that set up a system of fixed exchange rates with the US dollar as the international reserve currency. During that time the US dollar was convertible to Gold. This status meant that the Dollar was used to transact most international trade, further strengthening the Dollar. Many countries welcomed the idea of converting U.S Dollars to Gold. This trade grew until 1971 when President Nixon closed the Gold window and took the U.S. Dollar off of the Gold standard. Many believe the supply of Gold in Fort Knox had dwindled to nonexistence since there has not been a credible examination of our Gold reserves since 1953. Rumors and reports circulated that Gold was being bled from Fort Knox to help pay the bills of WWII and the Korean War. As a result of the Dollar no longer being backed by Gold, the world usage of the Dollar came into question and countries slowly started moving away from the Dollar.
The Rise and Fall of the Petrodollar
Quickly, the U.S. had to find a way for the world to use its currency and in 1974 the Petrodollar was born by striking a deal with the Saudi’s. All Oil contracts would then be written in Dollars and in return the U.S. would provide the Saudi Kingdom military aid and equipment. Additionally, the Saudi’s would plow billions of their revenue back into Treasuries and finance America’s spending. This trade continued to grow until the Petrodollar was broken in 2014 when China bypassed buying Oil in Dollars by striking a $100 Billion deal with Russia.
Instead of paying in U.S. Dollars they paid in Russian Rubles or the Chinese Yuan. Since then 17 other countries have followed suit. China has made not only preparations for their country to use their currency to buy Oil, but has now made significant strides for other countries to also bypass the Dollar and use the Yuan.
Gold has been gaining more attention in the last 15 years due to the high debt of the U.S. and also low interest rates around the world. Central Banks are the number one buyers of Gold. The Chinese making their currency convertible to gold is an added incentive for countries to buy Oil with the Yuan that is convertible to Gold, rather than paying in the U.S. Dollar. China is the largest producer of Gold in the world and the country that consumes the most Oil in the world. Its imports have nearly doubled in the last 5 years. As China imports more Oil, the idea of paying for Oil in their currency becomes more critical. The natural way of getting your currency on the global map is to tie your currency into the two most widely traded commodities in the world, Oil and Gold. To accomplish this, much needs to be put into place.
The Set Up
In 2002 The Shanghai Gold Exchange was opened. This not only allowed the citizens of China to buy Gold, but on a larger scale the world can buy Gold through this Chinese exchange. In 2005 China announces it is going to buy 1,000 tons of Gold in the next five years. In 2010 China announced it surpassed its goal and bought 1,027 tons of Gold. The following year China announced that it wanted 10,000 tons of Gold over the next decade. This was not enough. China currently produces 12% of the world’s Gold, but to be involved in the global market of Gold you need to be centrally located in the main hub of Gold which is London. In 2013 China set up an international bank in London. Through this agreement with London, China launches a pilot program to allow London-based investors to buy up to $80 billion of Yuan in stocks, bonds, and money market instruments directly from the Chinese bank. This has grown to currently 62% of the Yuan trades in London which give it a firmer foot print in Europe. HSBC said by the end of 2018, China’s total trade will be in the Yuan, which will make it fully convertible and will elevate it to the top 3 currency exchanges. The London Bullion Market Association (LBMA), the head of Gold trading in the world, welcomed three Chinese banks to become an Accredited Price Participant in 2015. The Bank of China, China Construction Bank, and Industrial and Commercial Bank of China all join the ranks along now with Goldman Sachs, HSBC, JP Morgan, just to name a few. This is a major milestone that now allowed China to help set the daily price of Gold.
China continued to move forward and in 2016 purchased one of London’s largest Gold vaults. Additionally a historic announcement was made by The International Monetary Fund who welcomed the Chinese Yuan into the Special Drawing Rights, (SDR’s), which is a type of currency used solely in central banks. China is third on the list of 6 currencies behind the Dollar and the Euro. To bring confidence to the world by countries knowing there is adequate physical Gold holdings in The London Bullion Market Association, the LBMA for the first time in decades discloses their physical Gold holdings. On July 31st of this year, Ruth Crowell, Chief Executive of the LBMA made an announcement by first asking, “How much Gold and Silver is there in the London vaults? It’s a question that I’ve been asked since I joined the market a decade ago and one I’m sure that was asked many years before. Today, I’m delighted not only to give a meaningful answer, but also to announce that these numbers will be available monthly from now on….”. The LBMA announced it has 7,449 tons of Gold, and 32,078 tons of silver. China is now at the center of the Gold trade. In London it has banks, vaults, and is a member who sets the price of Gold through the LBMA, that just disclosed they have enough Gold to trade with.
In May of 2017 China opened the Shanghai International Energy Exchange (SIEE). In the following months China opened more than 6,000 trading accounts for its long waited crude future contracts. In June and July the SIEE conducted systems tests with foreign companies such as investment funds, trading houses, and petroleum companies. Russia is China’s biggest supplier in Oil, supplying them almost 30% of their Oil. Russia has also been aggressively buying Gold. This relationship is a natural step for Russia. In a major break of decades of rivalry, last month Russian President, Vladimir Putin, met with Saudi King Salman. This broke the ice between the two countries developed since the Cold War. King Salman said he was looking to expand relations with Russia to development of the world economy.
Saudi Arabia’s IPO
Saudi Arabia’s largest Oil client is China. Keep in mind Saudi Arabia also loves Gold, which is why they originally agreed with the U.S. China has been in negotiations with Saudi Arabia, which China purchases over 25% of their Oil from. Saudi Aramco, which is Saudi Arabia’s national Oil Company, is going to go global with the largest initial public offering (IPO) ever and the first round of its IPO is only 5%. Last week on CNBC, billionaire investor, Prince Alwaleed said he wouldn’t be surprised if China doesn’t buy into Aramco when the IPO launches in the middle of next year. As a possible enticement on August 24th this year, Saudi Vice Minister of Economy and Planning, Mohammed al-Tuwaijri, said their government was looking at the possibility of issuing a Yuan-denominated bond. If Saudi Arabia accepts the Yuan settlement for Oil that can be converted to Gold, this would go down like a lead balloon in Washington. The U.S Treasury would see this as a threat to the dollar.
Saudi Arabia’s alternative is perhaps even more of a financial detriment, being “loyal” to the U.S. and no longer selling 1 million barrels a day to China would cause a surplus of Oil to the Saudis and drive the price of Oil down to a sustained lower price. The very reason the Saudi’s are going to raise an IPO of $100 billion initially is that Oil has dropped to the mid $30’s in previous years, causing a massive recession and cash flow problems in Saudi Arabia. Doing an IPO requires many hoops to jump through. The most challenging way for Ramco to launch the IPO would be through either the New York Stock Exchange or the London Exchange. This is due to the significant amount of regulations these two countries have that IPO’s must pass. Reuters news service, the most respected global news service, announced on October 16th that China offered to buy the whole 5% directly from Ramco as a private IPO. Saudi Arabia’s Crown Prince Mohammed bin Salman said “ The Chinese want to secure Oil supplies. They are willing to take the whole 5 percent, or even more, alone.”
Billionaire investor Prince Alwaleed said last week on CNBC that “I wouldn’t be surprised if China doesn’t buy into Ramco’s IPO.” He went on to say there might be more than just the one IPO, that there could be multiples. Let’s read between the lines now. My prediction is that because Saudi Arabia needs immediate cash they will strike a private IPO deal with China with the first 5% sometime early to mid-next year. While doing so, they will continue to work on a global IPO that will be launched in either New York or in London which will take much more time to meet all of the stringent requirements. This will be the very reason they will announce to the U.S. to not cause turmoil between our two countries. Therefore the natural thing is to not lose your largest client which is China, and continue to supply them with Oil. Receive your payment in the Yuan and convert a portion of that into Gold.
Two Months to Launch, Oil for Gold
Last week the announcement came, something that China has been planning for almost 2 decades. China announced that it was two months away from launching their Petroyuan convertible to Gold. “Approval of the trading rules by the securities regulator marks the clearance of a major hurdle toward launch of the contract,” said Li Zhoulei, a securities analyst. Many news agencies are starting to report this news and many agree it will be one of the top stories to follow in the fourth quarter of 2017.
Let’s look at the numbers, China imports around 7.6 million barrels a day. Multiply that by $50 a barrel which is $380 million a day times 365 days in a year which is $138.7 billion that doesn’t go into the U.S Dollar any more but rather converts to Gold. This is just year one.
How much would the U.S. Dollar go down and Gold go up the first year?
Would this trigger a sell off of the Dollar and Treasuries?
What would happen if more Oil producing countries started wanting payment in Gold rather than payment in U.S Dollars?
How would our country respond? Aggressively raise rates to attract investors to hold Dollars?
Would this trigger a Bail In, forcing U.S. citizens to hold Dollars?
Many scenarios, yet all are bleak. In just a couple of months we could see a major shift in the world wanting stability, wanting Gold. Isn’t that what you want, stability in an unstable world? Isn’t today your day to make the call and get your financial future secured by owning Gold and Silver?
Call Landmark Capital today and get yourself ahead of the curve, Black Gold for Yellow Gold, The Trade That Changes the World.