China's appetite for gold continues to grow. In 2022, China was the world’s largest gold producer. In addition, the People’s Bank of China (PBoC) continues to add gold to its reserves, taking the total central bank gold reserves to 2,050t at the end of February 2023.
The country's massive gold stash suggests we could be on the cusp of a radical change in the global monetary system.
Renowned speculator Nick Giambruno points to Chinese President Xi Jinping’s recent visit to Saudi Arabia and other Gulf Cooperation Council (GCC) states to launch "a new paradigm of all-dimensional energy cooperation."
GCC states — Saudi Arabia, Kuwait, Qatar, Bahrain, Oman, and the United Arab Emirates — account for over 25% of global oil exports. China is the GCC’s largest trading partner, with over 25% of its oil imports from Saudi Arabia. Hence, the meetings reflect a growing trade relationship between China, the world’s largest oil importer, and the GCC, the world’s largest oil exporters.
During Xi’s visit, he said, "China will continue to import large quantities of crude oil from GCC countries, expand imports of liquefied natural gas, and use the Shanghai International Energy Exchange (INE) as a platform to carry out yuan settlement of oil and gas trade." For context, the Shanghai International Energy Exchange (INE) launched a crude oil futures contract denominated in Chinese yuan in March 2018. The contract is based on Brent crude oil, the global benchmark for oil prices, and allows oil producers to sell their oil for Chinese yuan instead of the U.S. dollar.
By trading in yuan, the INE oil futures contract is expected to reduce the reliance on the U.S. dollar while increasing the use of the Chinese yuan in global trade.
Nick Giambruno notes that “most oil producers don’t want to pile up a large yuan reserve.” This is where China’s massive gold stash comes in.
They’ve linked the crude futures contract with the ability to convert yuan into physical gold through exchanges in Shanghai and Hong Kong. Moreso, PetroChina and Sinopec, two Chinese oil firms, provide liquidity to the yuan crude futures. So, there'll be a bid if oil producers want to sell for yuan and gold.
On the date of publication, Andy Mukolo did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
