What a Gold-Backed Yuan and Cryptocurrencies May Mean for the Dollar

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Amoungst all the crypto news this, and crypto news that, was a tiny item appearing in the Nikkei Asian Review on September 1st. Reporting from Denpasar, Indonesia, Damon Evans wrote, “China 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.”

Not bitcoin backed, not ethereum backed, g-o-l-d backed. How low tech of the Chinese. For the moment, oil is priced in dollars, whether it’s Brent or West Texas Intermediate.

Evans explained,

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 (the world’s largest oil importer) says the yuan will be fully convertible into gold on exchanges in Shanghai and Hong Kong. This will be China's first commodities futures contract open to foreign companies such as investment funds, trading houses and petroleum companies.

China has wanted to unshackle itself from the dollar for a long time and now they’re giving yuan-denominated gold contracts a third try.

"It is a mechanism which is likely to appeal to oil producers that prefer to avoid using dollars, and are not ready to accept that being paid in yuan for oil sales to China is a good idea either," Alasdair Macleod, head of research at Goldmoney, said.

"It's a transfer of holding their assets in black liquid to yellow metal. It's a strategic move swapping oil for gold, rather than for U.S. Treasuries, which can be printed out of thin air," Grant Williams explained.

If Saudi Arabia accepts yuan settlement for oil, Louis-Vincent Gave said, "this would go down like a lead balloon in Washington, where the U.S. Treasury would see this as a threat to the dollar's hegemony... and it is unlikely the U.S. would continue to approve modern weapon sales to Saudi and the embedded protection of the House of Saud [the kingdom's ruling family] that comes with them."

Say China buys into Saudi Aramco, the pricing of Saudi oil could shift from U.S. dollars to yuan, said Macleod. Crucially, "if China can tie in Aramco, with Russia, Iran et al, she will have a degree of influence over nearly 40% of global production, and will be able to progress her desire to exclude dollars for yuan," he said.

In other currency news, Goldman Sachs “is weighing a new trading operation dedicated to bitcoin and other digital currencies, the first blue-chip Wall Street firm preparing to deal directly in this burgeoning yet controversial market, according to people familiar with the matter,” reports the Wall Street Journal.

It turns out Gov’t Sachs is just responding to customers wanting to play in the crypto space. Paul Vigna, Telos Demos and Liz Hoffman write,

Goldman’s seeks to serve a growing cadre of institutional investors wagering on bitcoin. Its effort could eventually entail a team of traders and salespeople making markets in bitcoins much as they do Japanese yen or shares of Apple Inc.

Some 70 hedge funds have bought bitcoin. The crypto currency's price volatility provide something traditional markets are lacking...action. “Goldman, once known as the nimblest trader on Wall Street, has struggled more than peers. Revenue in its fixed-income division fell 21% from last year through June, dragged down by poor performance in commodities and currencies.”

The dollar will soon be under attack: both from a gold-plated yuan and the cryptos. One wonders if this will all fit nicely with Janet Yellen’s plan to raise US dollar interest rates and shrink her employer’s balance sheet. I bet not.