By Nick Giambruno
Ron Paul told me this would happen…
Dr. Paul first laid out his theory in 2006, in a little-known speech, during an otherwise dull session of Congress. I think it’s his most important speech ever.
During the speech, Paul traced the history of the US dollar within the international financial system.
Crucially, he pointed out the one thing that would precipitate the US dollar’s collapse. Now that one thing is about to happen.
Here’s the most important part (emphasis mine):
The economic law that honest exchange demands only things of real value as currency cannot be repealed. The chaos that one day will ensue from our 35-year experiment with worldwide fiat money will require a return to money of real value. We will know that day is approaching when oil-producing countries demand gold, or its equivalent, for their oil rather than dollars or euros. The sooner the better.
In other words, we’ll know the dollar-centric monetary system is about to end when countries start trading oil for gold or its equivalent… not dollars.
Now—thanks to China—that’s about to happen in a very big way.
I discussed all of this with Ron Paul extensively at a past Casey Research conference. He told me he stands by his assessment.
China recently announced a mechanism that will make it possible to trade oil for gold on a large scale for the first time in many decades.
This mechanism could undermine the petrodollar system—the system that’s supported the US dollar as the top global currency since the 1970s.
I call it China’s “Golden Alternative” to the petrodollar.
Why the US Dollar Is So Special
The petrodollar system is the big reason the US dollar is so unique. Here’s how it works…
Oil is by far the largest and most strategic commodity market in the world. And, until recently, virtually anyone who wanted to import oil needed US dollars to pay for it.
Every country needs oil. And if foreign countries need US dollars to buy oil, they have a very compelling reason to hold large dollar reserves.
This creates a huge artificial market for US dollars. It also gives a tremendous boost to anyone who lives in the US or holds US dollars.
The petrodollar system is the reason foreign countries keep such large US dollar reserves.
Now China is set to hit the petrodollar with a mortal blow...
China’s Golden Alternative to the Petrodollar
Throughout history, every great power has had money that’s recognized around the world. Usually, these currencies have been tied to gold and silver.
Ancient Greece had the silver drachma. Rome had the silver denarius. The Islamic Caliphates had the gold dinar and the silver dirham. Venice had the gold ducat. Great Britain had the gold sovereign.
The United States used silver in its coins until 1964. And the dollar was under a pseudo-gold standard until 1971.
Now it’s China’s turn.
It’s no secret that China has been stashing away as much gold as it can.
Today, China is the world’s largest producer and buyer of gold. According to informed observers, China now has official reserves of over 160 million ounces. It also has 400 million ounces in the ground that it could potentially mine.
(The US, by contrast, claims it has official reserves of around 260 million ounces.)
China’s Golden Alternative is the reason it’s been stashing so much gold.
The Golden Alternative will allow anyone in the world to trade oil for gold. It will totally bypass the US dollar and the US financial system.
For many, it will be much more attractive than the petrodollar system.
The Golden Alternative is the beginning of the end of the international monetary system that has reigned since the early 1970s.
Here’s how it will work…
The Shanghai International Energy Exchange (INE) is about to launch a crude oil futures contract denominated in Chinese yuan. It will allow oil producers to sell their oil for yuan.
Of course, most oil producers don’t want a large reserve of yuan. China knows this.
That’s why China has explicitly linked the crude futures contract with the ability to convert yuan into physical gold through gold exchanges in Shanghai (the world’s largest physical gold market) and Hong Kong. The system won’t touch China’s official gold reserves.
Oil producers will have two ways to do this:
Bottom line, it will allow oil producers to sell oil for gold. Producers will be able to completely bypass the petrodollar system and any restrictions/regulations/sanctions of the US financial system.
I recently spoke with the officials at the exchange. They told me they plan to go live with the INE crude contract before the end of the year.
China Wants Pricing Power
One of China’s key goals here is to reduce the dollar’s influence over oil pricing.
China is the world’s largest oil importer. Developing the new crude contract gives it some global pricing power.
Currently, most of the $1.7 trillion worth of oil traded each year is priced off of two US dollar-denominated crude benchmarks: West Texas Intermediate (WTI) and Brent.
Beijing thinks the yuan crude contract will reflect the market conditions in Asia better. It could become the most important oil benchmark in Asia.
The vice-chairman of the China Securities Regulatory Commission recently said:
The country will make crude oil futures the new starting point of opening up all futures markets…
And then, we will allow foreign players, whose enthusiasm is very high at present, to enter other futures markets, such as iron ore and PTA, when conditions are ripe.
In other words, oil is just the beginning.
Eventually, China plans to challenge the dollar’s dominance over all commodities.
Read the rest of this article at International Man