Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
This Invisible Tech Stock Threatens Amazon with 800,000+ Online Stores - 21st Nov 19
Crude Oil Price Begins To Move Lower - 21st Nov 19
Cracks Spread in the Precious Metals Bullion Banks’ Price Management System - 21st Nov 19
Why Record-High Stock Prices Mean You Should Buy More - 20th Nov 19
This Invisible Company Powers Almost the Entire Finance Industry - 20th Nov 19
Zig-Zagging Gold Is Not Necessarily Bearish Gold - 20th Nov 19
Legal Status of Cannabis Seeds in the UK - 20th Nov 19
The Next Gold Rush Could Be About To Happen Here - 20th Nov 19
China's Grand Plan to Take Over the World - 19th Nov 19
Interest Rates Heading Zero or Negative to Prop Up Debt Bubble - 19th Nov 19
Plethora of Potential Financial Crisis Triggers - 19th Nov 19
Trade News Still Relevant? - 19th Nov 19
Comments on Catena Media Q3 Report 2019 - 19th Nov 19
Venezuela’s Hyperinflation Drags On For A Near Record—36 Months - 18th Nov 19
Intellectual Property as the New Guild System - 18th Nov 19
Gold Mining Stocks Q3’ 2019 Fundamentals - 18th Nov 19
The Best Way To Play The Coming Gold Boom - 18th Nov 19
What ECB’s Tiering Means for Gold - 17th Nov 19
DOJ Asked to Examine New Systemic Risk in Gold & Silver Markets - 17th Nov 19
Dow Jones Stock Market Cycle Update and are we there yet? - 17th Nov 19
When the Crude Oil Price Collapses Below $40 What Happens? PART III - 17th Nov 19
If History Repeats, Gold is Headed to $8,000 - 17th Nov 19
All You Need To Know About Cryptocurrency - 17th Nov 19
What happens To The Global Economy If Oil Collapses Below $40 – Part II - 15th Nov 19
America’s Exceptionalism’s Non-intervention Slide to Conquest, Empire - and Socialism - 15th Nov 19
Five Gold Charts to Contemplate as We Prepare for the New Year - 15th Nov 19
Best Gaming CPU Nov 2019 - Budget, Mid and High End PC System Processors - 15th Nov 19
Lend Money Without A Credit Check — Is That Possible? - 15th Nov 19
Gold and Silver Capitulation Time - 14th Nov 19
The Case for a Silver Price Rally - 14th Nov 19
What Happens To The Global Economy If the Oil Price Collapses Below $40 - 14th Nov 19
7 days of Free FX + Crypto Forecasts -- Join in - 14th Nov 19
How to Use Price Cycles and Profit as a Swing Trader – SPX, Bonds, Gold, Nat Gas - 13th Nov 19
Morrisons Throwing Thousands of Bonus More Points at Big Spend Shoppers - JACKPOT! - 13th Nov 19
What to Do NOW in Case of a Future Banking System Breakdown - 13th Nov 19
Why China is likely to remain the ‘world’s factory’ for some time to come - 13th Nov 19
Gold Price Breaks Down, Waving Good-bye to the 2019 Rally - 12th Nov 19
Fed Can't See the Bubbles Through the Lather - 12th Nov 19
Double 11 Record Sales Signal Strength of Chinese Consumption - 12th Nov 19
Welcome to the Zombie-land Of Oil, Gold and Stocks Investing – Part II - 12th Nov 19
Gold Retest Coming - 12th Nov 19
New Evidence Futures Markets Are Built for Manipulation - 12th Nov 19
Next 5 Year Future Proof Gaming PC Build Spec November 2019 - Ryzen 9 3900x, RTX 2080Ti... - 12th Nov 19

Market Oracle FREE Newsletter

$4 Billion Golden Oppoerunity

Yuan Gold Contacts a Step toward Reserve Currency

Currencies / China Currency Yuan Oct 23, 2011 - 02:10 AM GMT

By: Dr_Jeff_Lewis

Currencies

On Monday, the first gold contracts denominated in the Chinese Renminbi (also known informally as “yuan”) came to the Hong Kong market.  Analysts have been quick to note the implications of a yuan-denominated contract, realizing that the new contract could drive nearly three times as much demand as the dollar-denominated contract.


Looking at the yuan product from the macro-view, a move into gold is about more than just gold—it’s about reserve currency status. 

Dollar’s Monopoly

The US Dollar has a monopoly as the world’s reserve currency.  The size and scope of the US economy and financial markets, combined with the relative stability of the political climate, made the US dollar a preferred currency for international trade. 

However, the reason most cite for dollar dominance isn’t the United States’ role in international commerce, but its monopoly on a single product—oil.  In an agreement with Saudi Arabia, the United States effectively tied the global oil market to the US dollar.  No other currencies could be used to purchase “black gold,” the driver of modern industry.

Signs of Defiance

As China grows, it naturally wants to extend its reach as an economic powerhouse.  Recently, in a move that rattled those who see the dollar as the only reserve currency, China agreed to trade oil and energy products with Russia in their own currencies.  This should have been seen as a warning sign, a move that would lead to new policies to make the Renminbi a global currency for commerce.

Relative to other commodities, gold is relatively unimportant to commerce.  Most of us can keep our cars running and the factories on without gold. 

Renminbi Goes Global

Gold is a very important commodity in the realm of modern finance, however.  In allowing the markets to buy gold denominated in the Chinese currency, investors can essentially exchange yuan directly for other currencies, using gold as a proxy.

That is to say investors now have a binary trade to buy and sell Renminbi.  Buying the Renminbi requires holding a short gold position in yuan and a long gold position denominated in another currency.   Once the gold is netted out by equal short and long positions, investors have only foreign currency exposure.

Never before has it been so easy for investors to buy and sell Chinese Renminbi directly or indirectly.  Investors have long sought to play the rising Renminbi, but Chinese capital controls kept the currency as a primarily local institution.  Now it’s available to most everyone, and with two simple transactions, enough Renminbi can be purchased, provided there’s enough gold available to back each trade.

And so this is where the Chinese realize the importance of gold.  Allowing the yuan-denominated contract to trade will only increase investor appetite for other yuan-denominated commodities.  While oil contracts may be a few months or years away, the reality is that the Chinese are positioned to make the Renminbi a world reserve currency.  It’s only a matter of a few new commodity contracts to get the world’s attention.

Ian Fletcher is the author of the new book Free Trade Doesn’t Work: What Should Replace It and Why (USBIC, $24.95)  He is an Adjunct Fellow at the San Francisco office of the U.S. Business and Industry Council, a Washington think tank founded in 1933.  He was previously an economist in private practice, mostly serving hedge funds and private equity firms. He may be contacted at ian.fletcher@usbic.net.

© 2011 Copyright  Ian Fletcher - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

peter
23 Oct 11, 10:34
putting on a yuan usd spread

While technically possible to do I don't see how anyone would sell short gold/Yuan in Hong Kong and buy Gold/usd on the Comex. The two markets are never open at the same time. Being a spread trader myself it would be something I wouldn't do...to risky to have to wait until the next market opens to put on the other half of the spread. But that said, there are probably traders who will take the risk but I wouldn't be one of them. Your point is valid though and the Yuan denominated trading is going to continue to grow and pull interest away from the USD. And of course this is all bullish for gold!


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules