What is gold-backed oil?

January 24, 2018

What is gold-backed oil?

What is gold-backed oil?


Gold-backed oil is a concept introduced by China in 2017. It has been tipped to increase the value of gold substantially in the medium to long-term future, and the early signs are that this could come to fruition.Back in September 2017, it was revealed that China was planning to launch a crude oil futures contract which is priced in yuan, but convertible to gold.It has been tipped to the oil industry on its head, providing huge benefit for China, perhaps the expense of the United States. It's also likely to have a huge impact on the currency markets, as well as the price of gold, for reasons explained below.


Why is this such a game-changer?
It is believed the major oil exporters such as Iran and Russia would prefer to trade while stepping around unfavourable U.S sanctions. It is believed this will reduce overall demand for the U.S dollar, and increase demand for yuan in a big way/ Currently, China is the world's biggest exporter of oil. The ability to convert yuan into gold, on exchanges in Shanghai and Hong Kong, is likely to entice nations that might have been put off by the Chinese currency.


How does gold benefit?
The advantage for gold prices is two-fold... Firstly, less demand for the U.S dollar reliably results in an increase gold price. It has also been suggested that China would need to purchase a lot of gold in order to meet its obligations to back these yuan-based oil futures.

This increased demand will also send the gold price rocketing.

Of course, the higher the value of gold, the less of it China will need to meet these obligations. As such, it is likely the nation will plan other measures to keep the value of gold growing. The combination of a weak USD and an increased demand points to a one-way skyward street for gold value.

The gold-backed futures began trading in March 2018 on the Shanghai International Energy Exchange. It's widely considered to be the first hurdle to previously-unimpeded petro-dollar dominance. We're yet to witness the full impact of this contract being introduced.

Oil analyst Li Li called the future "an innovative way to fill in the void of voice representing buyers in Asia. With this launch, the market will pay more attention to China's demand story.: Considering their dominance of the oil market, it could potentially be the biggest milestone in Asia's crude oil market. Financial analyst Hayden Briscoe dubbed it: "the single biggest change in capital markets. maybe of all time."

The days of crude oil being priced either in relation to U.S dollar based Brent or West Texas Intermediate futures could be a thing of the past. Gold prices have mostly been on a upward trajectory since the back end of 2017, and this announcement would have played a role in that. Investors will undoubtedly be watching the long-term on oil prices, gold prices and the value of the yuan and dollar very closely.


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