by Kenneth Schortgen, The Daily Economist:
As central banks have gone on to expand money supplies to unthinkable levels over the past 17 years, many analysts in the gold space have discussed the possibility of returning sovereign currencies to a gold standard because debt levels have simply gotten too high. And with these hypotheses have also come conjectures on just how much the price of gold would have to be raised to backstop the world’s nearly $250 trillion of debt.
But yesterday saw a much different scenario hit the financial world, and one that could completely change or eradicate the long-standing petrodollar system that protects America’s dollar hegemony. And this scenario is coming out of China and offers the potential for a gold standard not coming from the backing of sovereign currencies and fiat debt, but from what many consider the one true currency that is needed to run every aspect of the global economy.
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.
The contract could become the most important Asia-based crude oil benchmark, given that China is the world’s biggest oil importer. Crude oil is usually priced in relation to Brent or West Texas Intermediate futures, both denominated in U.S. dollars.
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 says the yuan will be fully convertible into gold on exchanges in Shanghai and Hong Kong. – Nikkei Asia via The Daily Economist
Interestingly, using oil production as a benchmark for gold rather than trying to correlate a gold price for the hundreds of different sovereign currencies that do not all move in tandem is a much more stable measure since the only two variables in play are the amounts of gold and oil produced each year. And from there all you would have to do is use the gold to oil ratio to determine price.
As of late 2016 oil was a $1.72 trillion market, with gold production being only a $170 billion one. This equates to an Oil to Gold ratio of approximately 10.12:1. And at the current gold price of $1320, it would mean the price would have to multiply by that amount ($13,355) to be in line with a fair price value to backstop the energy sourse in an oil contract.
If you think about it, oil has been the global reserve currency since 1973 when the United States dollar went off the gold standard, and instead measured its value in relation to oil. So for the past 44 years oil has been the true global reserve currency, and all sovereign currencies simply measure themselves on that commodity.
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