The Curious Case of the Gold Backed Yuan Story Just Got Curiouser

The Idea of a Chinese Yuan Oil Contract Convertible into Gold Predates the September 1 Nikkei Asian Review story.

GoldMoney published an article on August 24 predicting that such a contract would be convertible into gold from the Shanghai Gold Exchange.

The story shifted in mid September to “gold would be sourced from outside China” to satisfy the oil for gold transaction when it was recognzied that gold can not be exported from the Shanghai Gold Exchange.

So far the Chinese government has not announced ANY gold backed or gold convertible oil contract.

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How The Gold Backed Yuan Story Fell Apart

In “Report: China Planning Gold Backed Yuan as Payment for Oil” we discussed a story that has been circulating since September 1 that appeared in the Nikkei Asian Review with the headline “China sees new world order with oil benchmark backed by gold

When the story first appeared we covered it with suspicion because the article did not cite a source, but simply opened with “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.” We noted that the story cited no official source or even an unnamed source and merely stated “China is expected”.

We asked expected by whom?

Last week, we noted that in ““The Gold Backed Yuan Story Forks Again as More Cracks Appear in the Story”” that the story about where the gold might be coming from to back the Yuan denominated oil futures contract. Many commentators had suggested that the gold would be sourced on the Shanghai Gold Exchange.

Indeed, on September 27 Jim Rickards wrote in Agora Financial’s The Daily Reckoning:

China just announced that any oil-exporter that accepts yuan for oil can convert the oil to gold on the Shanghai Gold Exchange and hedge the hard currency value of the gold on the Shanghai Futures Exchange.”

We found this curious because we had seen no Chinese announcement and were under the impression that gold could not leave the Shanghai Gold Exchange.

Earlier this week in Here Comes the Gold Backed Yuan- Without the Gold we noted that over a month after the September 1 Nikkei Asian Review story, we still had seen no announcement and that the source of the gold to “back the Yuan” had shifted from China to outside China (making it no longer gold backed but a CHOICE that an oil producer might make to take their Yuan proceeds from the sale of oil to China and buy gold).

A few days ago Rory Hall of the Daily Coin interviewed Alasdair Macleod of Gold Money who was cited in the September 1 Nikkei Asian Review story. During that interview Mr. Macleod attempted to clarify that status of the oil for gold arrangement: (starting at 9 minutes 13 seconds)

“There is another point I need to make absolutely clear. I saw an article the other day written by someone (Jim Rickards?) who sort of picked up on this idea and thought that China would be supplying the gold. NO, this is a means of sourcing gold out of international markets. China is not going to supply any gold whatsoever. China has ring fenced all her gold and all her citizens gold by having capital controls. They cant get one ounce out of China. China I can tell you has no intention of supplying ANY gold in payment for oil. The gold has to come from existing international markets.

Then, it follows the contract is indeed not gold backed or convertible into gold, but rather a situation that oil producers MIGHT choose to buy gold with their proceeds.

But where might “someone” have got the idea that the gold to support the Yuan oil futures contract might come from China?

Let’s look at a timeline:

Alasdair MacLeod writing for Gold Money on August 24 in “Gold – crossing the Rubicon“, prior to the publication of the Asian Nikkei Review story of September 1.

“Already, China is showing a preference to settling trade and energy deals in yuan, but to take this much further, it will need to offer gold convertibility to compete with the dollar. This appears to be being pursued in two steps, the first being oil suppliers given the opportunity to sell their oil for yuan, and to sell their yuan on the Shanghai futures exchange for gold, before the second step, a formal yuan convertibility, is eventually offered.”

The yuan-gold contract already exists, the oil-yuan contract will shortly be introduced. The Shanghai International Energy Exchange is currently training potential users and carrying out systems tests prior to launch later this year. Obviously, these futures contracts in gold and oil may need to be initially supported by the state banks to enable them to build liquidity. But importantly, it will allow Iran, Russia and other Asian producers to avoid Western banking sanctions by selling oil for gold.

On September 1, the Nikkei Asian Review story was published, citing “Yuan Backed by Gold”.

On September 13, gold researcher Koos Jansen’ comments to Rory Hall of the Daily Coin were published

“In addition, on Twitter I’ve read that people think all the gold in China can be used “to back the contract”. But they seem to be ignorant about the mechanics of the Shanghai Gold Exchange (SGE), the Chinese domestic gold market and the Shanghai International Gold Exchange (SGEI) that is located in Shanghai Free Trade Zone. All the gold in the Chinese domestic gold market is prohibited from being exported.”

On September 14, as if being reminded of this detail, Alasdair Macleod writing for Gold Money in “Outlook for the Dollar and the Price of Gold” notes

[China] is on the verge of offering oil producers the facility in the Shanghai futures markets to swap oil for yuan and yuan for gold, sourced from outside China. There can be little doubt that oil producers will see this as an attractive alternative to the dollar. Russia and Iran are already signed up. Other countries, such as Venezuela, heavily dependent on Chinese oil demand, appear to be in the process of doing so.

The arrangement that Mr. McLeod discusses above and with The Daily Coin whereby gold is sourced outside China, does not make the Yuan denominated oil transaction “gold backed”

If the latest version of the unannounced Gold Backed Yuan story rests here, there is no gold backed yuan story at all.

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