There are clear supply pressures coming to the gold market, so the last thing it needed was a new source of demand. But that’s exactly what it’s about to get, and as you’ll see, it could potentially push supply into a strained predicament. If this new development catches on it could lead to some fireworks in the gold market.
This source of demand comes from China’s announcement that oil exporters to China will accept yuan as payment. This is normally done in dollars (hence known as the petrodollar system). The yuan is not well established internationally yet, so as an incentive, China will offer its exporters the option to convert their yuan into gold. This will essentially result in a new source of gold demand, one not currently present in the market.
So how much gold are we talking about? Let’s run the numbers…
China’s imports in 2017 have averaged 8.55 million barrels of oil per day. This is already 14% more than last year, and has made them the world’s largest crude oil importer. Every report I’ve read says imports will continue to grow by double digits. A launch date for the program hasn’t been finalized, but let’s assume 9 million barrels per day starting next year.
The one-year forecast for a barrel of crude oil is $60 (it’s $59 as I write). That equates to $540,000,000 per day. At a $1,300 gold price, that means 415,384.6 ounces of gold per day could potentially be converted. That’s a whopping 151,615,384 ounces per year.
Not all of that would be converted, of course. But consider that many of the countries that export oil to China aren’t exactly friends of the US, and some are outright enemies, so the conversion rate would probably be greater than if it were all coming from Canada or Norway, or countries that already have a lot of gold. Further, conversions would almost certainly rise in a crisis, especially if Mike is right about the coming monetary shift.
This post was published at GoldSeek on Friday, 29 September 2017.