The petrodollar is the single most important fact that currently exists in economics, without question.  If any superpower and/or major oil-producing nation challenges it by accepting other fiat currencies for the payment of oil, convertible to gold, the U.S. stock markets would be crushed and the USD would succumb to intense selling pressures.

During the last few weeks, articles have been floating around that suggest a decisive shift away from the dollar may be closer to reality than most imagined.  Here is the article that initiated recent speculation.

China sees new world order with oil benchmark backed by goldChina is expected shortly to launch a crude oil futures contract priced in yuan and convertible into gold in what analysts say could be a game-changer for the industry. The contract could become the most important Asia-based crude oil benchmark, given that China is the world’s biggest oil importer. Crude oil is usually priced in relation to Brent or West Texas Intermediate futures, both denominated in U.S. dollars. China’s move will allow exporters such as Russia and Iran to circumvent U.S. sanctions by trading in yuan. To further entice trade, China says the yuan will be fully convertible into gold on exchanges in Shanghai and Hong Kong.” – Nikkei Asian Review, Sept 1, 2017

Cracks in Dollar are Getting Largerthe petrodollar “was set up by Henry Kissinger and Saudi princes in 1974 to prop up the U.S. dollar. At the time, confidence in the dollar was on shaky ground because President Nixon had ended gold convertibility of dollars in 1971. Saudi Arabia was receiving dollars for their oil shipments, but they could no longer convert the dollars to gold at a guaranteed price directly with the U.S. Treasury. The Saudis were secretly dumping dollars and buying gold on the London market. This was putting pressure on the bullion banks receiving the dollar. Confidence in the dollar began to crack. Henry Kissinger and Treasury Secretary William Simon worked out a plan. If the Saudis would price oil in dollars, U.S. banks would hold the dollar deposits for the Saudis. These dollars would be ‘recycled’ to developing economy borrowers, who in turn would buy manufactured goods from the U.S. and Europe. This would help the global economy and help the U.S. maintain price stability. The Saudis would get more customers and a stable dollar, and the U.S. would force the world to accept dollars because everyone would need the dollars to buy oil… The analytical question is, you can have a gold standard if you get the price right; what is the non-deflationary price? What price would gold have to be in order to support global trade and commerce, and bank balance sheets, without reducing the money supply? The answer is, $10,000 an ounce.” Jim Rickards, Sept 27, 2017

History behind this story has been brewing for quite some time.

China began courting Africa and the Gulf Cooperation Council (GCC) years ago. My first introduction to this phenomenon was a book: China Safari – On the Trail of Beijing’s Expansion in Africa. The first edition was printed in France in 2008, and it’s as prescient today as it was when first printed.  The gold-colored construction helmet on the cover was a nice touch.

Fast-forward to 2014. Here is a CCTV video clip where Chinese President Xi Jinping visits the Middle East, calling for better ties between China and Gulf nations and the acceleration of talks towards a free trade agreement and strategic dialogue…

The following references are few among the many, but they should nicely encapsulate the petroyuan topic.

From PetroDollar to PetroYuan – The Coming Proxy Wars… “Why would the central bank of Nigeria decide to sell dollars and buy Yuan?… Nigeria is Africa’s second largest oil and gas exporter. It holds as many dollars as it does because oil is sold in dollars. Nigeria gets paid in dollars which it then needs to recycle. This is the famous petrodollar in action. It is also a major reason the dollar is still the world’s major reserve currency and that in turn is why America can have such a monumental pile of debt and still (for now) be the  risk-off haven that institutional  investors run to when other currencies and markets become too risky and unstable… Two days ago the Nigerian Central Bank announced it was going to increase the share of its foreign currency reserves held in Yuan…What interest me is that prior to this announcement from Nigeria’s central bank, China has, for some years now, been working hard and successfully to buy exploitation rights in Nigeria’s oil fields.” GOLEM XIV Jan 31, 2014

Saudi Arabia’s Defense Minister and Crown Prince is in Beijing for meetings with Chinese leaders… “Chinese President Xi Jinping, who called Saudi Arabia ‘China’s good friend, brother and partner in the Middle East and Gulf region.’ According to Xinhua, Xi and Salman pledged ‘to strengthen [the] strategic partnership’ between China and Saudi Arabia. China and Saudi Arabia formed diplomatic relations rather late, in 1990. However, since then ties have expanded rapidly as China’s reliance on foreign oil has grown. In the fall of 2013, China officially overtook the United States as the largest net importer of oil.” – The Diplomat, March 14, 2014

Putin says China, Russia to settle more trade in yuan… “’As part of our cooperation with this country (China), we intend to use national currencies in mutual transactions,’ Putin said. ‘The initial deals for ruble and yuan are taking place. I want to note that we are ready to expand these opportunities in (our) energy resources trade.’ Spurred on by their often testy relations with the United States, Russia and China have long advocated reducing the role of the dollar in international trade.” – Reuters, Sept 10, 2014

The Rise of the “Petro-yuan” and the Slow Erosion of Dollar Hegemony… “For the last forty years, a pillar of dollar primacy has been the greenback’s dominant role in international energy markets. Today, China is leveraging its rise as an economic power, and as the most important incremental market for hydrocarbon exporters in the Persian Gulf and the former Soviet Union to circumscribe dollar dominance in global energy — with potentially profound ramifications for America’s strategic position. Since World War II, America’s geopolitical supremacy has rested not only on military might, but also on the dollar’s standing as the world’s leading transactional and reserve currency.” – The Daily Reckoning, Dec 2, 2014

Financial Times, Jan 2015…

The PetroYuan Is Born: Gazprom Now Settling All Crude Sales To China In Renminbi… “Western economic sanctions on Russia have pushed domestic oil producers to settle crude exports to China in yuan just as Russian oil is rising as a percentage of total Chinese crude imports. Meanwhile, the collapse in crude prices led to the first net outflow of petrodollars from financial markets in 18 years, and if Goldman’s projections prove correct, the net supply of petrodollars could fall by nearly $900 billion over the next three years. All of this comes as China is making a concerted push to settle loans from its newly-created infrastructure funds in renminbi.”Zero Hedge, June 9, 2015

Suddenly, “De-Dollarization” Is A Thing… “two of the foreign economies that allowed the dollar an artificial life extension beyond 1989—Russia and China—are carefully unveiling that most feared alternative, a viable, gold-backed international currency and potentially, several similar currencies that can displace the unjust hegemonic role of the dollar today. For several years both the Russian Federation and the Peoples’ Republic of China have been buying huge volumes of gold, largely to add to their central bank currency reserves which otherwise are typically in dollars or euro currencies. Until recently it was not clear quite why.” – John Rubino, Sept 16, 2017

Political Anticipation of Global Systemic Crisis…“The dollar will not disappear at the end of the year, certainly. But it is a matter of trend, and several big countries are going to rush on the petro-Yuans: Russia, Iran, Venezuela to start with, besides China. Practically, the dollar will lose value and trigger a leak out of a dollar-system which everyone knows as based on weak fundamentals. The likely massive return of dollars to the United States will cause inflation[16]. And we are entering the mined territory of the debate on the virtues and/or dangers of inflation on the US’ debt, a debate this article is not intended to enter. We know, though, that it exists and therefore some parts of the US governance system (beginning with the current president) may be in favour of a weaker dollar.” – Marie-Hélène Caillol at GEAB, Sept 21, 2017

Physical Gold Being Reintroduced Into Global Monetary System In A MAJOR Way – Here’s Why & HowMunknee, Sept 23, 2017

Prospects for Gold II… “The Chinese measure, which we have outlined above, will go contrary to the American decision of 1971. It is going to raise, and keep raising the price of gold, through its ‘oil – for Yuan – for gold’ scheme, if and when it is launched as programmed later this yearChina imports about eight million barrels of oil a day. A part of these imports comes from Russia, but the majority comes from the rest of the world’s oil producers. We can estimate that about six million barrels a day arrives in China, from oil producers in various parts of the world, who will find the Chinese offer very tempting. Some will go for the gold, others may hold off… Enormous amounts of oil going to China will have to be paid in gold. An economic balance will be established between those enormous quantities of oil and a relatively tiny amount of gold with which to pay for them… The present relationship between oil and gold is: 31.1 grams per ounce of gold, divided by 26 barrels = 1.196 grams of gold will purchase one barrel of oil. An unsustainably low purchasing power of gold, vis-a-vis oil. At $13,000 Dollars per gold ounce, one barrel of oil, at $50 Dollars, will be bought with 0.1196 grams of gold; perhaps we may see $13,000/oz gold in the not distant future.” – Hugo Salinas Price via Plata, Sept 25, 2017

Got your gold and silver?

I’ll end this diatribe with a classic movie clip: Rollover 1981.  Plug any country name into the dialogue.

Plan Your Trade, Trade Your Plan

TraderStef on Twitter