China is planning to bring back gold standards for international payment after several decades. Being the world’s largest importer of yellow metal, China is now preparing to launch an oil futures contract denominated in yuan and redeemable in gold. While the yuan is not yet a global trade settlement currency, China will make the plan possible by backing the yuan with gold for settling crude oil imports. China is also the largest importer of crude oil.

So far, globally, the dollar has been a major currency to pay for importing crude oil. China’s plan to import oil with yuan backed by gold would be a game changer as gold would become the de-facto payment standard despite the fact that all contracts might not finally be converted in gold.

The oil contract, to be traded on the Shanghai International Energy Exchange, will be China’s first futures contract that is open to international firms for trading. There is no official word on when the contract will be launched but testing has been underway since July.

Nigam Arora, an international market analyst and author of the Arora Report, said, “China’s move is the beginning of gold standards for trade in a new form. Gold is becoming less of a commodity and more of a currency as the contract is backed by nothing other than gold. If this move takes hold, gold has the potential to go up by several folds.”

Another implication of the Chinese contract would be that it would create a new oil benchmark. Currently, Brent and WTI are two different benchmarks accepted globally for crude oil. Nigam said, “If this initiative is successful, it will create a new benchmark similar to Brent Crude and West Texas Intermediate in oil. As far as its impact on gold is concerned, there is not enough freely available gold in the world to back more than a few small initiatives. Of course, if the price of gold jumps many folds, the situation will change.”…Read more at Business Standard


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