Market Insights, The US Dollar

The PetroYuan Might Crash the Dollar but the Gold Price Could Rise

Gold Alliance disclaimer

More than $1.5 billion trades within the first hour. That is how well China’s Yuan-denominated crude oil futures contract did when it began trading last week, living up to the hype that has been surrounding it leading up to the launch. Following the launch, the futures market seems very stable as the offshore yuan is in synch with the PetroYuan.

What will happen to the US dollar?

There have been plenty of attempts to launch the PetroYuan, and experts have been warning that its launch will come as a shock to investors who have not been paying attention. We have discussed this in a recent article, and now the yuan is real, ready to challenge the dominance of the USD as the world’s reserve currency, knocking out the US dollar. Just listen to China’s State-Owned Media “…the Petroyuan will shake People’s Confidence In The US Dollar”.

Investors have been warned

The threat to the US dollar is real, and it’s actually been present for a couple of years. In 2015, China dealt its first punch below the belt of the US dollar, when the third-largest oil producer in Russia, Gazprom Neft, pushed away from the dollar in favor of the yuan and other Asian currencies. Iran went down the same route that year when it started using the yuan and other foreign currencies in its trading.

2015 also saw the beginning of the development of China’s new Silk Road, and the yuan increased its influence in the European markets.

However, in 2015, China’s oil imports were not as significant as they are today, so the US petrodollar was still powerful. Since then, China’s oil imports have risen—in 2017, China became the largest consumer of imported crude in the world.

Will the PetroYuan gain dominance?

In a previous article, we discussed how the US dollar is backed by the Treasury, which has helped fuel the US deficit spending. If that support evaporates, we have good reason to worry.

As the world’s leading consumer of oil, China has significant leverage over Saudi Arabia to make them accept yuan in return for crude. We are already seeing the beginning of this in reporting that Beijing is pushing to renegotiate its trade deal with Saudi Arabia.

The establishment of the PetroYuan could be the death blow to the US dollar’s dominance: Oil exporters now have a viable alternative to the petrodollar. The reason oil producers are so excited about the Yuan is because China is allowing them to immediately trade their Yuan’s in the recently opened Shanghai exchange for gold. Yes, The Chinese are indirectly backing their currency with gold.

The US dollar’s value is mainly linked to its use as a vehicle for oil trade, and its not backed by anything other than the promise of the US government. When the usage of the dollar for oil trade decreases, so will the value of the dollar. This may be the opportunity for the yuan to become the world’s dominant currency overall, further diminishing the value of the dollar. How will our government respond to this threat is yet to be seen.

What about gold?

There is good news as well, however. Gold is returning to the headlines, now that the Chinese have introduced their combination of the PetroYuan and the ability to exchange Yuan for gold. It’s a way to reintroduce gold to the global monetary system—for the first time since the US abandoned the gold standard in the 1970s.

This is great news for gold owners! The resurgence could lead to a significant increase in the price of gold, as exporters will be more likely to choose a financial instrument that is backed by gold than one that is created out of thin air such as the US dollar. 

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