We have watched for years as China grew in strength economically, financially and militarily. They have pre-positioned themselves by making trade deals, setting up credit facilities and even an alternative clearing system to the West’s “SWIFT”. We also know China has been gobbling up global mine supply of gold for going on 10 years now. As I’ve written in the past, just using the back of a napkin, it can be surmised they now have hoarded 20,000 tons or more compared to the “supposed” 8,133 tons held by the U.S.
It is clear China has meticulously readied themselves to take the role of world leadership from the U.S. but do they really want the responsibility AND burden of issuing the reserve currency? This has always been the question and the answer from logical thinkers is “no”. No, because we (and of course China) have seen the result of the “burdens” that comes along with the privilege of issuing the reserve currency. I must confess, I too did not believe China would desire or even accept the responsibility of reserve currency status. I now believe this thought is mistaken! I will explain shortly.
The announcement of “yuan for oil, convertible into gold” is a game changer. China imports about 8 million barrels of oil per day, this works out to 3 billion barrels per year. At $50 per barrel, the oil trade by China is about $150 billion per year. If we compare that to total global production of gold, we find the 80 million ounces produced and priced at $1,300 currently amounts to just over $100 billion. In other words, China consumes more oil (in dollar terms) than ALL the gold produced in the world. Think about this for a moment, at current pricing, just one country uses more oil than the entire world produces money? Does the word “reset” at all come to mind?
Taking just one step back, China has over the last few years imported roughly 2,000 tons of gold per year. If we add India’s imports of roughly 1,000 tons per year, we see combined they are importing more than the 2,500 that are produced. These numbers by themselves illustrate that the gold supply had to come from somewhere …and that “somewhere” can only be from Western vaults. In order to extend and pretend their financial systems and currencies were sound, the West (led by the U.S.) has been bleeding their gold reserves.
