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Ask Olivier

Will China’s First Oil Futures Raise Gold Prices?

“Olivier: first, love the Hard Assets Alliance—I sleep better at night. As I understand it, the Chinese are trying to encourage oil sellers to accept their currency by trading gold futures on the Shanghai Futures exchange from March 26. Some analysts think that this move will raise gold prices. What are your thoughts?” —E.B.
 

You are right that China will start trading oil futures on the Shanghai Futures Exchange. Although this move is important in itself, it is part of a bigger trend.

In November 2015, the International Monetary Fund included the yuan in its basket of reserve currencies. In April 2016, Shanghai started trading gold.

These actions mark Beijing’s continued efforts to establish the yuan as a global reserve currency and replace the US dollar in the world’s commodity exchanges.

China is already the world’s largest producer of gold and many other commodities. It’s also the world’s largest importer of crude oil. Now add in China’s One Belt One Road initiative. 

While the US continues to debase its currency and lose credibility as the world’s leading economy, China is making moves to fill the void. This is not very different than what happened between the British Empire and a rising United States between WWI and WWII.

Trends like this start slowly and take decades to play out. Eventually, however, they unfold.

To answer your question, I doubt the launch of the petro-yuan futures will have a large, immediate impact on the gold market. From a global perspective, it only marks one small milestone in the long game that China is playing. But as an American, I am concerned about this trend for my children and grandchildren.

If you looking for the case to buy gold, let me tell you why I personally invest in bullion.

First, the world is drowning in excess sovereign and private debt. Governments from around the world will have no choice but to devalue their currencies in order to avoid outright default on their obligations.  

The fact that the US may lose comparative ground against China only makes the case more compelling in the long term.

While Western politicians make their moves based on short-term electoral whims, Bejiing’s leadership plays a chess match that spans multiple decades. I can’t help but admire their weighted moves.

The Chinese are the world’s biggest buyer of gold. Yet, they are not concerned about the price of gold this week, this month, this quarter, or even this year. If gold prices go down in the short term, they buy more gold. And that’s because, again, they play the long game.

Whenever I ask myself if my allocation to precious metals has become excessive, I look eastward at what China is doing. So far the Chinese are not showing any signs of dumping gold. Quite the contrary, they are overweight it.

I do not pretend that I know where gold prices will be in the next few months. But I am absolutely certain that gold will remain just as good an investment as it has been for the past 50 years or so.

Since the end of the gold standard in 1971, gold has outperformed the S&P 500, which has returned over 7% annually on average. I expect that trend to continue.

Now, why should any investor dismiss an asset class that:

  1. provides a superior long-term return,
  1. is not correlated to stocks and bonds,
  1. provides insurance against excess debt, debasement, and financial/banking crises,
  1. is not currently in a bubble (as of this writing, gold trades 30% below its 2011 highs),
  1. and finally, is sought after by the Chinese who are ultimate value seekers and strategists?

Maybe owning precious metals is not as exciting as owning bitcoins or FAANG shares.

Investing wisely can be boring. It takes patience and great courage to go against the crowd.

I hope my long answer is helpful, and I thank you for being a valued member of the Hard Assets Alliance community.

Olivier Garret

Olivier Garret, CEO
Hard Assets Alliance

 

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