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Petrodollar Faces Growing Threat From the East. Payments in Gold Across Asia

Public Policy

While the recent raft of Sino-Saudi trade agreements benefited Chinese soft power in protecting Xinjiang, and the Saudis by diversifying their economy, China’s slow intertwining with Saudi Arabia complements the Sino-Russian alliance. Primarily, its benefits could lead to a realistic threat to the petrodollar.

The Persian rival who showed the way

In 2012/2013, the US Treasury Department, under the Obama administration, initiated a raft of sanctions in an amateurish fashion against the Central Bank of Iran. As we were told, it was done to tire and bleed Iranian economic and social life enough to draw Tehran into negotiations concerning its nuclear programme. The argument of were they/weren’t they pursuing a weaponized nuclear program isn’t important; how the Iranians circumvented these sanctions is.

The sanctions were meant to be stifling, but the Iranians loosened this problematic liquidity noose by using all their banks that weren’t sanctioned, and sold rich Iranian oil to India. Of course, the Indians couldn’t pay Tehran directly. Neither could they pay bilaterally in rupees due to sanctions and infrastructure needed to trade in a bilateral currency. Instead, Iran requested that India pay in gold so India paid Turkey, the Middle East’s gold market, and Turkey gave Turkish gold to Iranian banks, which then swapped with the Central Bank of Iran.

Turkey, for its part, may soon be the gold payment intermediator across Asia, and is already nationalizing the sector with a demand for private confiscation occurring to support the Turkish economy, but this has scarcely been reported.

This clever evasion was known as the Iran-India-Turkey triangle. Iran was escaping the dominance of the US dollar and trading in real money, not a hegemonic fiat currency that was being printed hot-off-the-press all day. They were dealing in gold; not something that could be strangled through SWIFT and electrons traded on a screen easily. A simple intermediator and precious metals could break Obama’s heralded “crippling” sanctions.

Iran ideologically, as well as practically, wants nothing to do with the US dollar but rather it wants to be free of monetary pressures by the US on its domestic policies. The effectiveness of this evasion was a preview to what countries like China, Russia, and to a lesser extent India and South Korea, have all been trying to do: increase their independence from the US dollar. The Iranian gold triangle showed successful independence from US dollar reliance.

The Chinese usurpers and their yellow metal

Fast forward to March 2017; the Russian Central Bank opened its first overseas office in Beijing as an early step in phasing in a gold-backed standard of trade. This would be done by finalizing the issuance of the first federal loan bonds denominated in Chinese yuan and to allow gold imports from Russia.

The Chinese government wishes to internationalize the yuan, and conduct trade in yuan as it has been doing, and is beginning to increase trade with Russia. They’ve been taking these steps with bilateral trading, native trading systems and so on. However, when Russia and China agreed on their bilateral US$400 billion pipeline deal, China wished to, and did, pay for the pipeline with yuan treasury bonds, and then later for Russian oil in yuan.

This evasion of, and unprecedented breakaway from, the reign of the US dollar monetary system is taking many forms, but one of the most threatening is the Russians trading Chinese yuan for gold. The Russians are already taking Chinese yuan, made from the sales of their oil to China, back to the Shanghai Gold Exchange to then buy gold with yuan-denominated gold futures contracts – basically a barter system or trade.

The Chinese are hoping that by starting to assimilate the yuan futures contract for oil, facilitating the payment of oil in yuan, the hedging of which will be done in Shanghai, it will allow the yuan to be perceived as a primary currency for trading oil. The world’s top importer (China) and exporter (Russia) are taking steps to convert payments into gold. This is known. So, who would be the greatest asset to lure into trading oil for yuan? The Saudis, of course.

All the Chinese need is for the Saudis to sell China oil in exchange for yuan. If the House of Saud decides to pursue that exchange, the Gulf petro-monarchies will follow suit, and then Nigeria, and so on. This will fundamentally threaten the petrodollar.

Now the argument is that if China does this it will put a slam on Chinese exports, but China is undergoing an intentional metamorphosis from a producer and exporter to a service and consumer economy of internal products. Look to China’s technology sector, e-commerce sector, and other domestic sectors that will provide a large market for sustainable service and growth.

A second argument against this train of thought is that maybe China doesn’t want the yuan to be a world reserve currency but just have a strong currency; a gold-backed yuan currency. Having a gold trade note may not hurt Chinese exports as it transforms its economy and its future exports.

Beijing may also have thought that if Saudi Arabia is persuaded to trade in yuan or gold-backed yuan, etc, South Korea and Japan may follow suit, as both have been looking to detach from the US dollar.

China and Iran were the first to initiate bypassing the dollar, followed by Russia circumventing the SWIFT system and then India beginning to move away from the US dollar and starting bilateral trade deals. China and Japan made moves to trade directly, as did Japan with India, bypassing the dollar.

The use of alternative payment systems like gold, yuan, rupees, rubles and other monies, fiat and not, to evade the potential of sanctions and seizures of the US dollar, or its decline, are seen as favorable.

What decline?

Well, we can look at the historic East-West cycle, the baby-boom demographic in the West, the growing inequality in the wealth distribution cycle, the ratio of household debt as a percentage of disposable income, and for you history buffs, the Kondratiev wave are all peaking and are descending into a deflationary wave.

Wait, what?

Okay, all of those mentioned cycles are economic swings of wealth. Everything is pointing towards a declining West and a rising East. But we can equally blame central bankers’ quantitative easing policies of printing to prosperity. The idea is a falsity that also has only benefited the wealthier classes, and can’t beat back cyclical pressure. A shift in world monetary systems is occurring.

The Chinese economy has begun an economic restructuring and focus on domestic production and services. The Trump administration thinks weakening the US dollar will help American exports and likewise respectfully grow the US economy (or “grow” within the confines of the current monetary system). However, the overvalued dollar has subsidized the cherished “American standard of living,” and any weakening will now have detrimental effects.

The US needs to also restructure its economy to one that is based on production. It can no longer continue to run a debt-serviced economy that imports all goods it doesn’t produce. It’s unsustainable, and the continuous mistake of many. The wealth of the world is shifting eastwards.

The petrodollar is the last vestige of that “American standard of living” middle America cherishes, and if the gold trade bonds fly and yuan changes hands as the oil flows, the US is going to get a shock when Saudi Arabia likes the look of red paper as much as green, or worse yet, yellow metal, a lot of which is moving east.

Andrew Brennan is a dual Irish/American citizen who was educated in Ireland. He holds two Master of Arts degrees from the National University of Ireland, Galway. Andrew has previous experience in radio, research, and domestic television, and also currently contributes to Forbes and The Global Times.

Asia Times

20 Comments on "Petrodollar Faces Growing Threat From the East. Payments in Gold Across Asia"

  1. Apneaman on Fri, 5th May 2017 1:41 pm 

    They leave us no choice.

  2. onlooker on Fri, 5th May 2017 1:51 pm 

    You got AP, this is becoming a zero sum game ie. winners and losers. The Empire is not going down without a fight. Economic might vs. Military might

  3. Davy on Fri, 5th May 2017 1:59 pm 

    We have a dollar problem and the petro dollar is part of that but we also have a China and Euro problem. There are no currencies without problems now so to promote an agenda of anti-Americanism concerning world trade lacks substance. Where nations can practice bilateral trade they should but those avenues are limited. Gold’s usefulness is likewise limited. We have created a monster called the global system with a dollar reserve currency. The dollar system is now in many cases dysfunctional and will likely end one day but so will globalism. The following is just more of the same out of China. China is a mess and getting worse. If you are banking on an Asia Century ahead I think you are fooling yourself.

    “China FinMin Unexpectedly Skips Asian Trade Summit To Attend “Emergency Meeting”

    “Coming a time when traders and analysts are looking with growing concerns toward Beijing, riddled by deja vu memories of the China-induced near-bear market of 2016 when in a similar episode China’s credit impulse tumbled – something which even Pimco highlighted earlier this week, when it reposted a chart first shown here in February”

    “worries that not all may be well in China – for the second time in two years – grew this morning after the country’s Finance Minister, Xiao Jie, unexpectedly skipped a summit conference with his Japanese and South Korean peers on Friday to attend an “emergency domestic meeting”, a senior Japanese finance ministry official said quoted by Reuters”

    “But back to Xiao’s “emergency meeting” which took place just as prices of commodities traded in China plunged by the most in over a year, with iron ore falling limit down on Thursday, and then continuing to slide the next day, and with Chinese stocks falling to three-month lows as concerns about tighter financial regulations amid a crackdown on shadow banking weighed on banking shares.”

  4. Apneaman on Fri, 5th May 2017 5:17 pm 

    What an amazing and massive Cancer China is.

    Endless cities: will China’s new urbanisation just mean more sprawl?

    The announcement that new megacity Xiongan will be built near Beijing is the latest attempt to take pressure off China’s biggest metropolises. Can it work?

  5. Roger on Fri, 5th May 2017 5:22 pm 

    “We have a dollar problem and the petro dollar is part of that but we also have a China and Euro problem. There are no currencies without problems now so to promote an agenda of anti-Americanism concerning world trade lacks substance.”

    Gold worked well for centuries (until 1972) and could do so again.

  6. onlooker on Fri, 5th May 2017 5:54 pm

    Why We Should Be Concerned About Low Oil Prices

  7. Davy on Fri, 5th May 2017 6:08 pm 

    “Gold worked well for centuries (until 1972) and could do so again.”

    First I am not sure where you figured gold worked for centuries. Economic problems existed very far back and sometimes it was because of gold. Second you need to figure out how to assume and realize all the existing debt. That is a near impossibility considering how much there is and in relation to the global GDP. If that were the only problem because much of the debt is bad debt. A debt jubilee would mean the end of globalism so that is not an easy option.

    Gold works in a stable growing environment but not in the current dysfunction economics where the only way governments and businesses function is on debt. Globalism is dynamic and requires financialization with exotic instruments to work at the tempo it does today. Gold makes excessive debt difficult because it is a standard that must be adhered to. Without gold liquidity is arbitrary but with it liquidity becomes more fixed. Gold ties the hands of central banks and governments. We may want that but sometimes we want them to fix things. Gold is not going to make a difference anymore until all that debt can be mopped up and a majority of nations come to some kind of agreement on a new currency regime that includes gold.

  8. dave thompson on Fri, 5th May 2017 9:07 pm 

    Gold my ass. If one has the food and the other has the gold, just who do you think is going to make out in the long run? I for one will keep and eat my food, the gold will be of no value to me.

  9. twocats on Fri, 5th May 2017 10:38 pm 

    for centuries the person who had the gold could simply buy the land and then control who grew the food, oh yeah, and pay soldiers to defend the land. the system of a straight barter system would have to be in a very very low energy environment with near stone age levels of technological innovation. anything past that will have currency in some form or another.

  10. GregT on Sat, 6th May 2017 12:27 am 

    “Gold worked well for centuries (until 1972) and could do so again.”

    Don’t kid yourself. Gold still works very well.

  11. deadlykillerbeaz on Sat, 6th May 2017 6:43 am 

    A 10,000,000,000 Reichsmark got you a bus ride from one end of Stuttgart to the other. A Reichsmark that had been stamped with more zeros a couple of times. There is a photo of German women using Reichmarks for fuel in their wood burning stove.

    Money can become worthless. Paper money, clown bux, George Washington’s face on a dollar turned into a clown with some colored ink. They’re hilarious if you haven’t​ ever seen one. Nothing is sacred, not even a greenback dollar. Are we there yet?

    I dunno, but I doubt anyone will burn gold to heat the stove top.

    Gold has many uses and people have an affinity to have some. Pound it into leaf, make a Leyden jar. Cover the onion top of a mosque, it’ll look nice, beautiful. Gold is malleable, you can place it between two sheepskins, pound it into leaf.

    Gold comes in handy for satellite raw material, there is gold in the computer you own.

    A soft metal that doesn’t rust, it is a valuable metal.

    Why was gold minted into coin for money, a means of exchange? It is difficult to counterfeit.

    Fiat paper money grows on trees, aka a printing press. Digital fiat money just needs more electrons to grow.

    More is always better.

    73,000,000 barrels of oil equates to 10 million metric tons of oil, however, 73 million sounds like seven times more oil. It ain’t.

    20,000,000,000,000 dollars in debt can be fixed with 20 one trillion dollar platinum coins. Make them into one billion dollar pieces if you want, one thousand pieces of a one trillion dollar coin worth one billion dollars each. Make the coin a foot in diameter, divide it into a thousand pieces. Place them into circulation, 1/1000th of a platinum coin, minted as legal tender, each one worth one billion dollars.

    Pay it to the US Treasury, and then that’s that.

  12. Cloggie on Sat, 6th May 2017 6:52 am 

    Don’t kid yourself. Gold still works very well.

    Especially if you frequented right-wing/libertarian sites around 2002-2007 and acted upon their predictions.


  13. Ghung on Sat, 6th May 2017 9:49 am 

    Right, Cloggo, though I didn’t frequent right-wing/libertarian sites at the time. It was quite evident that gold and silver were really cheap at the time so I stocked up, not fully trusting other investments. That moved paid off big time around 2011, when I needed it most.

  14. Cloggie on Sat, 6th May 2017 10:03 am 

    Right, Cloggo, though I didn’t frequent right-wing/libertarian sites at the time.

    Leftist virtue signaling.

    It was quite evident that gold and silver were really cheap at the time so I stocked up, not fully trusting other investments. That moved paid off big time around 2011, when I needed it most.

    You are not the only one here.

  15. Ghung on Sat, 6th May 2017 10:13 am 

    Cloggo: “Leftist virtue signaling.”

    As usual reading things into others’ posts that aren’t there (or typical cloggesque baiting). In fact, I was way too busy at the time, helping to over-inflate the local real estate bubble. That’s why I went into precious metals.

  16. Cloggie on Sat, 6th May 2017 10:58 am 

    UK to become third world country?

    Please tell me this isn’t true Ghung (or joe). I would be devastated.

    Dutch newspapers and Holland in general are rather pro-British. They for instance never could get enough of John Cleese:

    The country (Britain) is after all a little bit our brainchild: Protestantism, capitalism, central banking, navy and what not, as they themselves readily admit:

    Now one of the left-leaning so-called “quality newspapers”, de Volkskrant, claims that now that the UK has opted for Brexit it has opted to become a “third world country”:

    Before Britain joined the Common Market in 1973 the country was in a horrible shape, but once they were in, life markedly improved on that rainy island. And by 1997, as the Bliar became PM, the British economy was the 4th in the world (“Cool Britannia”) and London became the hippest place on earth.

    According to the Volkskrant the country now is under threat to fall back again to Arthur Scargill levels of deplorability (my words).

    Asian and American companies no longer have any motive to settle in Britain again:

    Britain, or its deplorables rather under the inspiring leadership of Boris Johnson…

    … has put itself outside the Eurasian candy shop and now can admire the candy from outside. Folks with a rudimentary brain like Heseltine and the Bliar have already said they consider the move a disaster.

    Fortunately Britain can still team up with Turkey and Iceland.

  17. Davy on Sat, 6th May 2017 11:01 am 

    I am a firm believer in gold for the individual. I do not value my gold. It has intrinsic value for a prepper. I believe in small gold coins 1/10oz. I also believe in having some $100’s.

    Gold is not the same for the global economy. It is too late for a globalism plan b based on gold. Too much is wrong and the nature of the global economy is such that gold based payment platforms are unworkable in scale. This is not to say gold does not have a place especially as a hedge on the downside. I am only says it will not allow the status quo new opportunities.

  18. Northwest Resident on Sat, 6th May 2017 11:32 am 

    Hi Davy, I pretty much agree with what you wrote. But consider this. When the global economy finally crashes and burns never to return again, gold (and silver) will maintain value as almost all other assets lose all or most of their value. I wouldn’t expect that on day one of a post-economic crash world that gold will be useful for much — food, bullets, tools and skills will be. But after local economies have time to crawl out of the ashes and regional trade begins to pick up, at that time any gold and silver would once again become a highly valuable “money” as they have been throughout all of history, with the exception of the “age of fiat” that we’ve been living in. Agree?

  19. bobinget on Sat, 6th May 2017 11:35 am 

    (Swiped from the top oil trading board on net)
    IMO: Oil, then religion, fuels the world’s many crisis.

    Lots of moving parts…Lots of unknown’s… Pretty sure NOBODY has a handle of all of it….3+/- years ago before ISIS made their move…in the normal course of business the Gulf had to have had 100’s of million of bbls of oil in storage…the PTB were facing the ISIS threat…where a Toyota pickup with a couple of crazies looking for their virgins and with a carton of RPG’s could cost them hundreds of $millions… and to protect their own financial interest…moved the oil out of the Gulf…onto floating storage and flooding the market…NOBODY knows how much of that storage…if any…remains…a year ago sanctions came off Iran…allowing them add to the glut…today…Saudi is in the process of IPOing Aramco…and for many of the PTB in Saudi…this may be the last opportunity they will have to get a cut of those $billions without someone looking over their shoulder…that may be where the recent Saudi spurt is coming from….

    And with the cheap oil…many…maybe none of the producers are paying their bills…We know that Ecuador/Venezuela have not…Iraq is not paying the Kurds…Nigeria?…reports were a couple of years ago Saudi was not paying contractors….and recently SLB pulled out of a MOU with Iran…I suspect it was over money….SLB wanted theirs payments upfront… guaranteed…and the list goes on and on…

    At $50 oil the world producers are in crisis…cutting corners/borrowing money/slowpay-nopay their bills…trying to stay in business…next week/next month/next year the surplus oil will run out…when it does the world is in BIG TROUBLE…with no easy/quick fixes…

  20. Davy on Sat, 6th May 2017 12:22 pm 

    I agree NR, post globalism, post modernism, and if we survive that then gold will likely play a role in local economies. In the descent gold may be employed by nations to stabilize their economies. I don’t see a status quo part B running on gold. Anti-Americans are especially fond of the idea of the eclipse of the dollar by a Russia and or China gold based currency. They even talk about an IMF gold based reserve currency that will appear once the US collapses and the dollar is gone. Hyperinflation of a major currencies will strike everyone because all of these important currencies are connected. A run on one destabilizes the others. Gold is not going to unwind this connectedness. If anything it might precipitate a run on others if a country tries to revalue its currency with gold.

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