The Yuan Could Replace The U.S. Petrodollar As World's Reserve Currency - And That's Bullish For Gold

Summary

• China is now the world's largest importer of oil.
• It does not like having to make those oil purchase in U.S. dollars.
• As a result, China is using various techniques to encourage (forcing?) countries to accept the Yuan in oil transaction.
• If successful, it could mean the end of the U.S. petrodollar as the world's reserve currency of choice.
• This would be very bullish for gold.

In my Seeking Alpha article China's New Gold-Backed Oil Futures Contract Cuts Out The U.S. Dollar I explained how this new and recent development could cause massive disruption in to today's global oil market. But China isn't stopping there. The USA Today reports China is now using its status as the world's biggest oil importer to strong-arm Saudi Arabia to accept the Yuan in oil transactions. I think this is one of the most important and least publicized developments in the global currency markets.

Carl Weinberg, chief economist and managing director at High Frequency Economics, is taking the issue seriously because growing domestic production in the U.S. means that very shortly Chinese oil demand will dwarf U.S. demand. Weinberg says:

I believe that yuan pricing of oil is coming and as soon as the Saudis move to accept it — as the Chinese will compel them to do — then the rest of the oil market will move along with them.

This obviously has huge implications for the U.S. petrodollar. China's crude imports averaged around 7.6 million barrels a day in 2016. At $50/bbl, that equates to trading of an estimated $138 billion on an annual basis. For comparison, note the total market cap of the SPDR Gold Trust ETF (NYSEARCA:GLD) is around $35 billion. I mention that just as a comparison metric for investors to judge the potential impact if only 25% of China's oil imports were to trade based on this new futures contract.

Source: Nikkei Asian Review

And, as shown above, it is clear that China is intelligently diversifying its sources of imported, with Saudia Arabia making up only 12.5% of total imports during the first 6-months of this year. Meantime, Saudi Arabia's exports to the U.S. have dropped from over 2 million bpd in 2003 to a current ~1 million bpd this year:

Source: EIA

Meantime, Russia is now the largest source of oil for China after some big energy and pipeline deals that I reported on back in 2013. These deals did not use the U.S. dollar.

Note that Russia, Brazil, and Venezuela alone accounted for around 25% of China's total oil imports (see graphic above). If Saudi Arabia capitulates to using the Yuan for oil trades, Middle Eastern exporters like Iraq and Iran would likely follow. That means that - very quickly - more than 50% of China's imports could potentially be non-U.S. dollar denominated transactions. If so, the impact would be huge. Over time it could erode the U.S. "petro-dollar's" role as the world's reserve currency of choice - and this would have a dramatic affect on the U.S.:

1. The value of the U.S. dollar would likely fall significantly; imports would be more expensive, but it would also help U.S. manufacturing and exports.
2. The U.S. Congress would very likely no longer be able raise the U.S. debt limit (i.e., print more U.S. dollars) indefinitely because global demand for the U.S. dollars will likely fall - perhaps dramatically.
3. As a result, the value of gold, globally priced in U.S. dollars, would likely rise.

And of course oil - being the largest globally traded commodity - would likely have a big impact on the U.S. dollar being the world's reserve currency. Countries like China, Russia, India, Turkey, Brazil, and Venezuela have proposed using IMF "special drawing rights," or SDRs - which would be calculated daily from a basket of various currencies: the U.S. dollar, euro, Japanese yen, British pounds, and Chinese yuan - for international payments. Some have also advocated that precious metals like gold and silver also be components of any globally agreed upon SDR "basket." While the U.S. has been fighting such a move due to the obvious advantages of being the world's reserve currency (i.e. being able to raise the debt limit whenever it desires), ironically it may find itself need to support the idea of an "SDR basket" of currencies just to prop-up the US$ against the Yuan.

All this is obviously very bullish for gold. And when we factor in one of the most politically uncertain eras in U.S. history (see my 3-part series on Gold: The Possibility Of A Trump Induced Rally), I am amazed gold is currently trading under $1,300/ounce. Consider that we actually have a well respected U.S. Republican Senator saying out loud that Trump could be leading the U.S. onto a path to WWIII. An editorial in today's NY Times promotes the idea of barring the president from launching a first nuclear strike without a declaration of war by Congress.

Meantime, the administration's "tax reform" policy of giving additional tax breaks to the wealthy and corporations is believed to have dire consequences for the already blooming Federal debt. The Washington Post reports that the Republican party's tax policies are likely to add likely to add trillions to the deficit and relies on overly rosy projections of economic growth to minimize its budget impact. We've seen this game before. It is just the opposite of what the U.S. should be doing if one believes the days of the U.S. petrodollar dominating world trade could be numbered.

Summary & Conclusion

With U.S. crude oil exports recently hitting 2 million bpd, and growing, it is clear that if Saudi Arabia wants to keep its market share in China it will likely have to do so on China's terms: and that means accepting the Chinese Yuan instead of the US$.

The outlook for gold is the most bullish of my lifetime. All U.S. investors should allocate a portion of their portfolio to gold as an insurance policy against the very real possibility that the US$ could be dethroned as the world's reserve currency of choice. Whether it be the highly liquid GLD ETF or phyical gold bullion, U.S. investors should be taking steps now for the very real possibility that the days of the U.S. petrodollar are numbered. Regardless, I suspect we will see gold rocket to new all-time highs before President Trump leaves office.

Source: Kitco

Analyst’s Disclosure: I am/we are long GOLD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I am an engineer, not a CFA. The information and data presented in this article were obtained from company documents and/or sources believed to be reliable, but which have not been independently verified. Therefore, the author makes no warranty as to its completeness or accuracy. All readers are advised to do their own research and contact a qualified investment advisor. The author is not responsible for investment decisions you make.

Comments

[Michael Fitzsimmons]

Main Street - the difference between you and I is that you view gold as a short-term trading vehicle and I view it as a core long-term holding and an insurance policy. You never know, the Trump and the Republican Senate may be successful in their goal of transitioning the US from a democracy to a dictator/oligarch style that Trump and Putin prefer. In that case, Americans should expect the US$ to go the way of the ruble, and they'll be clamoring for gold.

I have never suggested any of my followers ever sell gold. On the contrary, I suggest they take advantage of short-term volatility on the downside (such as after Trump was elected) to buy and just hold it. You call it "incoherent", but most investment professionals suggest all investors buy and hold a certain % of precious metals. Are they all "incoherent" and you are the only genius in the group?

[Main Street 63]

So 6 or 7 years ago, a chap looking at a 10 year plan for retirement,..... On the back of your pumping gold incessantly drops $1,000,000 of his 401K (or similar fund source) into gold like you seem to think was a fabulous idea.....

Right now, his investment is worth well over 35% LESS (taking into account inflation, storage fees & commissions) than when he started,..... & you seem to think this is a good thing ??

Meanwhile,..... He would have DOUBLED his investment if he had gone with the spread of the Dow Jones Index,.....

& the "genius" is ??

Gold bugs are hilarious in their levels of cognitive dissonance.

:)

[Michael Fitzsimmons]

In the early 1900's a 1 ounce $20 gold piece would buy a man a nice suit, tie, shirt, belt, socks, and pair of shoes. Flash forward to today. What does the $20 buy you - maybe the belt? What does the 1 oz of gold buy you? I still buys a nice suit, a tie, shirt, belt and pair of shoes.

Understand now why (some) people like to own some gold?

No offense, but you keep making a fundamental flaw in your "cognitive dissonance" in that you seem to have the opinion that if someone (in particular, me) suggests an investment in gold that that means that person is recommending to *only* invest in gold and nothing else. This is simply not true. Again, most investment professionals suggest all investors own a portion of their net worth in precious metals as part of a well-diversified portfolio that will stand the test of time. Typically a range of 5-15% in precious metals is mentioned, and I agree with that. And I would suggest that the higher a person's net worth is, the higher the % gold should be.

So you can discount the advice and laugh at gold bugs all you want, and that is fine. Your choice and that is what makes a market. But gold bugs have history on their side as paper currency after paper currency has failed and gold has held up its purchasing power just fine. And that is not speculation. That's just a fact.

[James Myung]

A handful of gold could had bought an entire block of land in downtown germany when there was hyperinflation in early 1900. This would probably have an exponential return by now. I would have 20-30% of gold as insurance/hedging like Michael said, and use the rest portfolio to trade whatever. This will also smoothen the return during the up/down market cycle. If the market collapses, sell the 20-30% gold and buy depressed assets/financial instruments...

I once went to a bank with a travel baggage to buy 2kg gold and 20kg silver, but I failed... My banker told me it will take a few weeks for them to approve this transaction... I considered that as a bad luck and went home... lol

[Main Street 63]

"Those that sold then made a mistake" .....

Errrr,.... What ???

Gold plummeted from 1800 to less than 1100 & people that cut their losses before being forced into something akin to ruin made a mistake.

Wow,.... You'd last less than a week on the main floor of even a small exchange,..... Is it any wonder that your predictions are virtually incoherent.

@specguy is right.

[Michael Fitzsimmons]

It is becoming ever more clear after Trump's weekend tweet-storm that Mueller is closing in on him and he is getting more and more unstable. Trump has either been totally compromised by the Russians or is a fool that is failing to protect America from the Russians. Either way, he should be impeached. And I believe he will be and will validate everything I have been saying and everything you have been ignoring. Thank God we have at least two Republicans (Mueller & Flake) who are trying to save America from this gang of traitors! As far as I am concerned, just about all the other Republican Senators are "enablers" working for Trump/Putin/Russian interests instead of the interest of the American people.

Buy gold ... US Constitutional crisis coming ....

[Main Street 63]

Oh please.

There are no fundamental reasons to be buying gold simply because of a potential constitutional crisis that in all likelihood will never eventuate.

[Michael Fitzsimmons]

Main Street - I never said it was the only reason, it's one more reason in addition to:

1) Big-time Trump/Republican led deficits and debt
2) Trump/Mnuchin talking the value of the US$ down
3) A huge slug of US debt coming onto the market at the same time the Fed is trying to dispose of assets bought during "quantitative easing"
4) geopolitical uncertainty led by Trump and the rest of the world no longer knowing/understanding where the US is coming from
5) possible trade disasters due to a lack of depth of analysis by a team that, well, doesn't do a whole lot of analysis (on anything)

I have never seen the outlook for gold look better than it does right now. Gold going much much higher. In fact, I'd go so far as to say the longer Trump stays in office the better the outlook for gold. So in the long run, I would agree that a constitutional crisis (which I do believe is coming because I do believe Putin will order Trump to fire Mueller...) that ends in impeachment would actually be bearish for gold ... after it is over ... but ... if it looks like the US is turning toward the Trump/Putin preferred style of government (dictator/oligarch), Americans will wish they owned lots of gold. Just ask Russians that own rubles ...

[specguy]

Michael Fitzsimmons, you should be kicked off SA for politicking.

This is NOT your personal platform to espouse your fervently held wishes.

You add nothing of value to the issues of trading and investing with comments such as yours.

Buy gold? Is that it? Pathetic.

[Main Street 63]

I read your article,..... & at no stage do you make reference to ANY official sources regarding gold's role in the Shanghai Futures Exchange,.... Lots of conjecture & wild assumptions based on the meanderings of others, but little else.

Still waiting for you to show where gold is backing the oil futures traded on the Shanghai Futures Exchange by means of a contract reference,..... Surely it can't be that hard, can it?

[Michael Fitzsimmons]

Main Street - I get it, it's all hype, conjecture, and wild assumptions according to you. Here is the latest on all this "hype" from Bloomberg:

https://bloom.bg/2BW8G5Z

[Main Street 63]

Where is the mention of gold backing all of the futures trades like you claimed previously?

I never denied the fact that trading of oil futures in Yaun on the Shanghai Futures Exchange was going to happen,.... In fact I came out in support of it as a common sense expectation that they have been trying to achieve since 1993.

My comments on hype, conjecture and wild assumptions do not apply to Bloomberg et al,..... They apply to your article.

The Bloomberg article is mostly fluff by the way,.... But you knew that already, right?

[Michael Fitzsimmons]

Main Street - Where did I say gold would back all futures trades? Don't you ever tire of coming up with false narratives?

What, exactly, was "hype" in my article? Get specific. You talk about "wild assumptions" without specifically listing them. Try to stay on topic and please don't generate another false narrative to debate. Stick to your assertion that the article is full of "hype, conjecture and wild assumptions" and point them out.

I will also note that once I give you the reference you asked for, by a respected global financial reporting company like Bloomberg, you say that is fluff too! lol Apparently, we are nto to believe Asian oil traders and Bloomberg and are to believe you instead! lol

[Main Street 63]

Oh dear.

You do realize that what you are trying to do is talk about China's oil imports by using a FUTURES exchange in Yaun as the basis for the imminent destruction of the US petrodollar?

You must also realize that a FUTURES exchange does not stand for delivery of an actual product much like the existing COMEX?

This smacks of the typical hype surrounding the "stand for delivery and subsequent collapse the gold market on the COMEX" nonsense ,..... It will never happen and yet, the ignorant continue to try & scare the children into buying physical gold as the hedge against the "imminent" collapse.... It really is quite hilarious.

China wants to price & trade oil FUTURES in Yuan primarily to head off the middle men from taking a slice of the pie in currency exchange fees and in reality little more. This is something they have been looking to do since 1993 by the way so it's certainly nothing new.

I mentioned that US people buying local would see zero difference in what the USD or gold does,.... & then you went & tied imports to that equation,.... Why go down that road when it was obvious that a falling dollar would hammer import prices? ..... It's a moot point and does nothing for your position.

The whole "debt" hype is also just that,.... Hype from those that have an ulterior motive,.... Gee , I wonder what that might be ??

[Michael Fitzsimmons]

Oh dear.

You do realize that China, the world's largest importer of oil, wants to pay for oil in its own currency - the Yuan. Right?

And you do understand that the US is importing much less oil and that the OPEC producers are looking for a new home for that oil. Right?

Now you tell me, with all the producers out there, who do you think China is going to buy from - those that will pay in yuan, or those who demand payment in US$?

Oh dear.

[Main Street 63]

Wow,..... Some real confirmation bias going on here by the looks of things......

At the end of the day we are not talking about the physical exchange of a currency here,.... It's all electronic.

Which makes the whole "petrodollar crisis" even more laughable,..... It simply means a cadre of middlemen don't get a slice of the action in an exchange scenario if China buys oil & pays in Yuan,.... Big deal...... Nothing to see here,.... Move along.

You missed the entire point of what a futures exchange is as well by the looks of things,..... They can trade oil futures in pork bellies for all anyone cares, but seeing as how the oil futures in question are being traded on the Shanghai Futures Exchange, it makes sense to run the transactions in the local currency and especially when no physical commodity is going to change hands....

Oil traded on a futures exchange has nothing to do with whatever oil is physically imported and all the hype that has been waffled about is due to the futures exchange starting to trade in Yuan..... China's imports have never come into that equation, but good luck to you for assuming that. It won't do you much good though.

In reality, a "petrodollar" does not actually exist,.... You did know this didn't you?,..... It's like people saying there are billions of $$ exchanged in goods every day on the COMEX and that somehow adds legitimacy to their argument about how critical their favored commodity is to the rest of the world...... It isn't, because what they are all trading does not actually exist, it's simply a legal casino where wagers are made on price fluctuations on fictitious amounts of goods and nothing more.

The physical trade & exchange of actual goods is done elsewhere,.... NOT on futures exchanges,.... The amount of people ignorant of this fact is utterly staggering.

[Michael Fitzsimmons]

There was no "confirmation bias" in my last post, that is simply a false narrative on your part. I just gave you the macro picture on China, oil, and the yuan. If you don't want to see it, that is - of course - your choice. But it's pretty obvious to oil traders in Asia, and they have been writing about it for almost a year. Not so much in the states. Funny how that is.

[Michael Fitzsimmons]

NOTE: China plans to launch its long-awaited crude oil futures contract on March 26:

https://seekingalpha.c...

This, combined with the recent spending agreement impact on deficit/debt:

http://nyti.ms/2BjTwq8

Means Americans should be buying gold.

[Main Street 63]

Myth.

https://seekingalpha.c...

[Michael Fitzsimmons]

We'll see .... all I know is that China is now the #1 oil importer in the world and they want to pay for it in Yuan.

Meantime, the FBI/Justice Dept. lost another key person today.

Trump/Putin/Russia: 1
USA: 0

Americans should be buying gold ... this is not going to be pretty. It would appear we will have either one of two outcomes, neither of which is good:

1) A constitutional crisis (likely).
2) A complete transition to a dictatorial/oligarch style of government like (you guessed it...) Russia has.

Seems like Republican Senators hold the key as to which way we go. Either they will allow the special prosecutor to continue the investigation in the the Trump/Putin/Russia connection, or not.

[Main Street 63]

What is the fundamental reason for Americans to buy gold? .... Especially given the very lackluster performance of both it & silver over the last 6 years?

Surely it cannot be as a hedge against your own currency is it as that would be tantamount to a fools errand.

China can,.... & should,..... Be able to buy oil in Yuan in any case,.... In truth it already can. This whole "petro dollar" nonsense is also a myth perpetrated by those that are trying to use that angle to pump gold sales by means of the "imminent petro dollar collapse". It's rubbish and always has been.

It doesn't matter a hill of beans as to what a commodity is priced in once your own currency exchange is factored in and most people are very well aware of that. The exchange rate is the key here, not the actual currency of the transaction.

For the far greater majority of Americans that buy local, what the USD is doing and what gold is doing means absolutely nothing. The hype is all rather silly IMHO.

:)

[E.D. Hart]

How it fits in is well considered: for the Yuan to gain more use in the international markets (to say nothing of hegemony) three criteria need be met 1) a deep and liquid bond market, 2) loosening of internal and external controls, and 3) the markets confidence.

Gold backing, even 20% say, gives markets confidence in a new currency...and is a rational way forward for China to increase its economic sovereignty.

[Michael Fitzsimmons]

Hello E.D. - yes, I would agree with that. And of course the other lever that China can control is when it comes to oil supply and demand. It's no secret Saudi Arabia is now looking for a new home for the millions of bpd of oil it used to export to the United States. China is basically saying, hey, we are now the world's largest importer of crude oil, and if you want to sell all those barrels to us, you need to take our currency. Otherwise, they can simply buy from someone else. And let's face it, the U.S. doesn't have a lot of friends in the ME any more. Not real friends anyway.

[George eFF]

Let’s not for a single moment forget what China does with its imported oil. It makes products that are exported to the US ! You pushers of Gold, not a single one of you in your Detailed Posts considered how this important factor fits into the World Yen and the Gold as a realistic answer to replace the Dollar.

[Michael Fitzsimmons]

George - it's a pretty well-known and well publicized fact that China has a huge trade surplus with the U.S. Thx

[traders3931]

The bull market for metals will not start until the middle of next year, 2018. Keep your powder dry.

[Michael Fitzsimmons]

Hi trader - well, GLD is up 11% this year. Certainly not as good as the S&P500, but respectable. I just don't know what's holding gold down considering the instability of the U.S. government with respect to Russia, trade, foreign policy, global warming, tax "reform" and just about any other serious issue. Seems to be debt is going to sky-rocket while the uber-wealthy and corporate elite make off with all the money (socked away in off-shore accounts that won't even get taxed....). Meantime, all of Trump's policies seem to drive all other countries toward China as a reliable partner going forward. Can you say "Make China Great Again"?

[User 1357201]

All aboard The Gold Train!

[Michael Fitzsimmons]

Yes and I am completely amazed that gold isn't much stronger considering the leadership in the White House that agrees with Putin over the U.S. intelligence agencies. Combine that with the deficits that will be generated by giving the corporate elite and uber-wealthy more tax breaks by squeezing the middle class even more, along with the idiotic approach being taken with trade (that seems destined to "Make China Great Again", and it seems to me the U.S. dollar should be diving and gold much much higher. Should be interesting!

[specguy]

MF, you should reread my comments again. You demonstrate high emotionalism in your writing, and not careful thinking.
That's pathetic.
Out.

[Michael Fitzsimmons]

specguy - no need to read it again, my reading comprehension skills are quite good. As for emotionalism and careful thinking, I noticed you chose not to respond to any of my questions. Apparently you like paying a higher tax rate than Trump (who likely pays none at all...) and are willing to give the uber-wealthy even more favorable tax treatments. So what I find pathetic is the millions of middle class (and lower class...) Americans who think Trump is going to be their "savior" when all Trump is doing is using the Presidency to enrich himself and his family. THAT is what is pathetic.

Meantime, Manafort gets indicted and we can only hope he spills the beans on the Trump/Putin/Russia bromance so he can be impeached and we can end his nightmare "presidency", which has been anything but "presidential". Thx & bye-bye.

[specguy]

"The more wealth you have, the more you have to lose so I suggest a higher percentage for the uber-wealthy (even though most of them, like Trump, pay little or no taxes as all....)."

MF, when I read this kind of statement I wonder if the writer gets the hypocrisy embedded therein. Most everyone I've come in contact with wants more money than less; on that I think we can agree.

Bernie Sanders (your preferred Presidential candidate) and his ilk hate the rich but would still love to emulate their lifestyles, or some semblance thereof. Sanders never had a real job, kind of like Obama, but they really know the 'right and fair' way to redistribute everyone else's wealth because they are experts at Marxist dogma. I don't resent the rich, nor do most Americans as they are striving to increase their wealth as best they can. What they (and I) DO resent is a rigged system where the rich have come by their wealth at the expense of the other. A recent example is the US taxpayer footing the bill for the rescue of the criminal banking industry just a few years ago (a catastrophe of their own doing), while our 'leaders' selected winners and losers among them. The winners got their huge bonuses and continue to do so for their outstanding performances and obeisance to their elite money masters. The 'losers' are still well fed and NOBODY went to prison, let alone no indictments. This is corruption, masterfully orchestrated by the 'uber wealthy' for the merely 'uber rich'.

As for your apparent hatred for President Trump: he doesn't pay taxes on his massive wealth because he avails himself of the legal methods of doing so through the 35 million words of the convoluted US Tax Code. Warren Buffett does likewise (and is hypocrisy incarnate), as does Bill Gates, et al. If you are looking to direct blame for this, consider the individuals who are responsible for writing our tax laws...Senators, Congressional Representatives and especially the big money lobbyists representing the big money interests.

Suggestion: Try to redirect your existential hatred of President Trump and look inward for reflection and elucidation.

[Michael Fitzsimmons]

specguy - there is no hypocrisy in my statement whatsoever. Bernie Sanders doesn't "hate the rich", he just wants to turn around a system that has people like Trump and Buffet paying a lower tax rate than you and I. I agree with that. So does Buffet. Trump obviously does not.

Let me ask you some question: what could you do with $300 billion that you couldn't do with $200 billion? Why do you favor paying a higher tax-rate than hedge fund managers in NYC that make $100's of millions a year gambling with other peoples' money? Why do you favor the corporate welfare system that Trump and his ilk what to increase rather than a system that is more skewed to favor the middle class? Why do you support bailouts for the already uber-wealthy like the executives at Goldman Sachs and AIG that were on the receiving end of billions of $ in bailout money in the wanning years of Bush #2's last year?

Can you not see the hypocrisy of that kind of system? That resembles the dictator oligarchical system of Putin's Russia more so than "free enterprise".

So was I for Sanders as compared to Clinton and Trump? You bet I was. And if you think Trump is going to do anything to help the middle class, just like those who thought Bush #2 would, you are going to be very surprised at the outcome. We have already seen how Trump wants to help the out-of-work coal miners (i.e. cut the only benefit they have left: Medicaid). And we have already had a peak at Trump's "tax reform", yet another massive transfer of wealth from the middle class to the already uber-wealthy like the Koch brothers. Good luck with that.

Nothing will "redirect my existential hatred of President Trump", the man is simply unworthy of the trust this country put in him, unstable, a compulsive liar and I can go on and on ... and on .. and then on some more. That so many Americans have such a rigid ideological attachment to Trump that makes them rationalize away all of his obvious faults is ... well, very sad and pathetic to me. Thx

[E.D. Hart]

Trump is simply a con-man--will do anything to get what he wants, and he did a great job conning slightly less than half of the electorate (those that voted anyway). He is not a conservative, and not a Republican--except in name only. To be anti-Trump is to be pro-conservative in many ways,

[specguy]

E.D. Hart,
more Politicking than commenting on gold, PMs and trading/investing...SA not the place for it.

Leave the site, please if you can't restrain yourself, thanks.

I hope others will join in and comment on this as it wastes the readers' time while you vent your political spleen.

[traders3931]

DX appears to have a low in place. Not bullish gold if true.

[Michael Fitzsimmons]

DX? dollar exchange? Well, the dollar rose ~2% recently because they think Trump is going to nominate a Fed chief that is more hawkish. Still down ~7% this year. My call on gold is not a short- or medium-term call. It is a long-term bull call for all US investors to own 5-15% of their wealth in gold. The more wealth you have, the more you have to lose so I suggest a higher percentage for the uber-wealthy (even though most of them, like Trump, pay little or no taxes as all....).

[jklk0429]

Thanks! How about RMB denominated investments?

[Michael Fitzsimmons]

Not my field of expertise ... but I guess the theme would be, in general, and simply: "China".

[James Myung]

I bought some CHL a few days ago, which indirectly owing RMB. If RMB outperforms against other currencies, which it has done so far, despite the fact that China continuously devalued its owned currency.

Owing CHL is like owing some RMB at the same time compounding additional income (dividend in RMB).

But, I have a huge portfolio in oil/gas..., which I think will be a good hedging against both USD and RMB.

Just my opinion...

[Michael Fitzsimmons]

Hi James - thanks, and I like your call on CHL. Note it also yields 3.6%:

http://tinyurl.com/y7q...

[jklk0429]

Thanks Michael for your work. I may have missed something above as I am a bot late here, but, outside of metals related investments (miners, gold) what would you suggest looking at to protect when the Renminbi usurps the USD?

Thanks, JK

[Michael Fitzsimmons]

jklk0429 - it's a good question. I would say invest in those hard assets that you can find in the US that the rest of the world (and China) will want. If the US$ falls, the price of oil (in US$) will go up. So too for gasoline and diesel. Chickens. Beef. Food. Clean water. Perhaps bitcoin. But my favorite investment for this theme is gold. Thx

[ship99]

Michael, What are the Saudis going to do with their Yuans?
And why would they put their trust on the Chinese Communist party?
I can easily see the Chinese printing Yuans and exchanging them for VLCCs
filled with oil.

Money is 100% about trust, a point the bankers of the western world have
been taking ample advantage of. One country, Switzerland is built solely
on this principle.

[Michael Fitzsimmons]

ship99 - I guess the main reason I believe the Saudis will accept Yuan is because:

1) the Saudis are looking to find a home for the 1 million bpd of crude oil they used to export to the U.S.
2) at the same time, the US is now exporting crude oil onto the global market.
3) China, now the world's largest oil importer, is the likely candidate considering the other big potential importer, India, is not there yet

So if Saudi wants to export its oil to China, it would appear to me they will have to do so on China's terms, i.e. pay for it in Yuan.

What they will do with the Yuan is going to be dependent on how much and how fast China decides to establish the Yuan in global markets. But China exports lots of stuff ... I am sure Saudi Arabia buys a lot of Chinese stuff. The US certainly does. I am also sure Saudi would not be opposed to using Chinese labor to build industries to diversify their economy. Oh, look, SA just recently signed a $60 billion deal for projects:

http://bit.ly/2zpQhKq

[Forty Years a Speculator]

There is one exception, gold and silver the poor man's gold.
You can't debase gold & silver but all paper currencies can be debased and will be debased. I am old enough to remember when you could buy a candy bar for a nickel.

[Michael Fitzsimmons]

Hi Forty - That's right, and gumball machines that used to take pennies now take quarters. You may be interested in what the estimated value of an ounce of gold would be today if the US was still on the gold standard:

https://seekingalpha.c...

(hint: $5228/ounce)

[jstratt]

Michael chose a topic that certainly illustrates an investment risk. I note that I have been considering natural resources stocks in part to hedge currency risk.

At the same time I have heard this thesis my entire investing lifetime. My guess is a basket of currencies develops for worldwide trade and gold could certainly have a place. Perhaps even Oil and other natural resources.

At the same time damaging the US economy or other major economies like Europe would also damage the entire world. Even China! So I am not quite as cataclysmic in my view of the future.

I do agree changes are on the horizon.

[Michael Fitzsimmons]

jstratt - yes you are right, and the incident at the Olympics where Putin suggested the Chinese leader would join him in putting their combined US$ debt on the market at the same time as it would "sink the US". The Chinese leader responded "yes, it would sink the US, but it would sink us as well".

So I am not suggesting a cataclysmic event because the Chinese are not stupid. But what I am saying is that if the Chinese are successful in using the Yuan as a currency to pay for its imported oil, it's a big deal. It is a direct slap in the face of the U.S. petrodollar. That is because China is now the planet's largest oil importer. So I think it will advance the shift from the US$ to an SDR that is composed of a basket of currencies - including primarily the US$, Yuan, Euro and likely some allocation to gold. Thx

[Billionaire888]

Creating a narrative and then stating that based on this narrative an asset class will rise is folly. If your initial premise is false or outrageous, any result achieved from it is simply a dream.

In other words, this article makes no sense...

[Michael Fitzsimmons]

Billionaire - that is certainly your opinion, and you are welcome to it. But note the narrative wasn't mine - it is being reported out of Asia by oil traders in Singapore where it is the talk of the markets these days. As a result, I would be more impressed if you would have come up with an argument for why Saudi Arabia won't be accepting yuan in exchange for their oil. Since you failed to do that, I can't take your comments very seriously. All you said is "if you initial premise is false" without making an argument for why it may be false. Then you say the article "makes no sense". Seems to me you missed a big step (i.e. stating WHY it makes no sense). Thx

[it's magic]

There is a flaw in the system, Yuan is demandless due to the fact it's a pegged currency in a closed capital account, to ensure it's legitmacy "China will back it with gold", then what prevents those oil producing nations take direct payment in gold shippments instead[redeem those paper for gold instantly]?

[Michael Fitzsimmons]

magic - well, all I can say it wait and see. If Saudi Arabia wants to sell the 1million bpd it used to sell to the U.S. to China, they are going to have to come to grips with the Yuan. We will see what happens. Me, I'll bet on China. They can call the shots on this. Let's check back in a year. As for gold, the Chinese introduced the Yuan/gold backed crude futures contract to get the ball rolling with the Yuan. I seriously doubt the Chinese have any intention of letting that ball roll until they are out of gold. Thx

[Michael Fitzsimmons]

Hello Peace Grunt - thanks for the link. I seriously doubt China has the intention of exchanging most of their gold for oil. I think they just want to get the Yuan established and then will gradually stop the Yuan based, gold backed, crude contracts. That said, I obviously do feel that gold is going to appreciate, especially for Americans, as the US$ declines. The only thing that has saved the US$ from a big decline has been the massive increase in shale oil & gas production. And oil is another good thing to own if you believe the US$ will decline. You can tell by some of the typically arrogant responses to this article calling me a leftist or communist or all the other irrational conclusions that some Americans have when reading a piece like this, so many will be caught completely off-guard as the Yuan emerges as a global currency. Not me. I have already seen what the Chinese can do when they have a goal and focus on it. Thx and have a great weekend!