Petro yuan greatest gold price influence

A gold-backed petro yuan will allow oil producers to sell oil to China in yuan, and then exchange yuan into gold via the Shanghai Gold Exchange. This system will be competing directly with the US petrodollar.

Alternative_InvestmentsAn old Chinese proverb states: “The best time to plant a tree is 20 years ago. The second-best time is today.” The future price of gold is best understood through long-term irreversible trends. Today’s macro trend changes are part of a looming tectonic shift that started decades ago, and have not been adequately reported.

In November 2017, China, India, Russia, Brazil and South Africa, the major producers and users of gold, agreed to establish their own gold trading system using their own currencies, thereby bypassing the US dollar. Implementation will begin in 2018.

The most important influence in 2018 and beyond is the announcement, made in 2017, that China will establish a gold-backed petro yuan. This will allow oil producers to sell oil to China in yuan, and then exchange yuan into gold via the Shanghai Gold Exchange. This system will be competing directly with the US petrodollar.

China has become the world’s biggest oil importer, and that means that the oil price will be set there, like it or not. Pricing oil in yuan will have a huge impact on the exchange value of the yuan, the US dollar and, correspondingly, the price of gold.

Will gold rise to $10,000 per ounce?

When I wrote my book, $10,000 Gold: Why Gold’s Inevitable Rise Is the Investor’s Safe Haven in 2011, my forecast was based on the positive correlation of the US dollar gold price and US debt between 1970 and 2010.

Since then, the rise of US debt has accelerated, but the gold price experienced a puzzling correction that was due to the numerous massive unexplained naked short sales of COMEX (formerly known as Commodity Exchange Inc.) gold.

Today, in order to normalize this relationship, the gold price should be about US$1,900 per ounce. When gold is liberated from the artificial paper price, the increase will surpass my US$10,000-per-ounce forecast.

While most people find this incredulous, one only has to consider the relative amount of paper financial assets to physical gold and mine supply to gain an appreciation that this is realistic.

Asset value bubbles sitting on a mountain of debt

There is about US$294 trillion of global financial assets consisting of equities, bonds and mortgages. When you eliminate religious artifacts, jewelry and central bank gold, it leaves about 40,000 tonnes of gold bullion equal to only about US$1.8 trillion.

Annual mine supply is about 2,800 tonnes, and it has been in decline since peaking in 2016. It is projected to decline by 76 per cent by 2029. New mines take about 19.5 years to go into production.

No new major discoveries over 3 million ounces have been made since 2009. As a result, the only adjusting factor for increased demand is an adjustment in price.

This is while the global financial system experiences a condition not seen since 1929, a simultaneous triple bubble in stocks, bonds and real estate—all sitting on a historically unprecedented pile of US$270 trillion in unpayable government, sub-prime auto, student loan, margin and consumer debt.

Added to a very dangerous mountain of over US$600 trillion of derivatives, conditions are set for a major market correction. This will result in a massive increase in the price of gold as investors flee to the safety of gold.

Nick Barisheff is founder, president and CEO of BMG Group.

This is an edited version of an article that was originally published for subscribers in the March 9, 2018, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.

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