Oil - Will it Be Priced in Currencies Other Than the U.S. $?

By: Julian D. W. Phillips | Fri, Oct 16, 2009
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This is a snippet from a recent issue of the Gold Forecaster with Subscriber-only parts excluded.

Market Alert

We sent you this Alert on the 6th October, based on a report from a leading British newspaper, the "Independent": - Further to our Alert of the 20th August 2009 we have just received newspaper news [we need to hear this from the States involved first before it is accepted] that we have been forecasting for some years: -

"China, Russia, Japan & France are working with oil producers in the Middle East to permit currencies other than the U.S. $ to be used to pay for oil. This basket of currencies will include the Japanese Yen, the Chinese Yuan, and the €. It is reported in leading U.K. newspapers that this payment may be in a 'new' currency that is made up of these currencies. It is also reported that a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar would form part of this 'basket' While we wait for confirmation from the countries involved, the news is in the market place and affecting gold strongly now. The most likely candidate for the 'new' money is the old Special Drawing Right of the International Monetary Fund. With the Chinese Yuan heading for one of the component parts of the Special Drawing Right in its next review by the I.M.F., the move would also incorporate the U.S. $, but break the link between oil and the $ a feature of the monetary world that has persisted for around 40 years now." -

Russia and Saudi Arabia have denied this news already and it is likely that if there is any truth to the story it will not be publicized this way. However, it remains expected by the market eventually and because of this the gold price is moving through overhead resistance! It is as if to say we expect it, so it is time to discount it now!

Once proved true and if true now, the era of uncertainty and monetary instability will be exacerbated by this break, taking the $'s prime support away from it and exposing it to the criteria that measures all other global currencies. This accounting will be bad for the $ and very, very positive for gold!

True or False?

The weight of China's growing power demands that the Yuan come onto the world monetary stage. The weight of $ reserves [$2 trillion+] demands that the $ retain its buying power while being slowly eased to one side. The weight of China's economic power [which still has a huge way to grow] demands that it issue the Yuan internationally and allow exchange rate forces to impact upon its exchange rate value. With its Balance of Payments strength, the Yuan should rise, but if the Yuan were issued freely abroad, the market would not let it appreciate so much. So why are they concerned about the $ oil price?

It is rapidly being accepted that the future points to the waning economic power of the U.S. and the rising economic power of the East. For over 40 years the oil price has been made in the U.S. $ almost exclusively. With the U.S. sitting with major economic problems and yet providing the globe with its reserve currency the world is realizing that the global reserve currency should be independent of any single currency, particularly under one nation's exclusive influence. But it is also true that any transition must be done slowly to allow the 'departing' currency to retain its buying power on the way down. This is the dilemma facing the world.

With the world running on oil the world must run on the $ so long as it is the sole price of oil.

If there is to be an eventual new basket of currencies [whether under the umbrella of the I.M.F. as an S.D.R. or not] as the 'new' global reserve currency, a lessening dependence on the $ has to follow. Likewise, trade between two nations outside of the U.S.A. should be permitted in the currencies of the two countries concerned or in the 'new' global currency and not rely on the $. This should include oil too.

The world cannot use the $ as the only oil currency if oil producers are to receive a well priced amount for a barrel of oil, if that currency is declining steadily. The international power that the currency of oil brings is enormous! Should that power lie with a nation who is experiencing monetary problems, alone? What is certain is that further global monetary changes must come. The story from the Independent whether true or false, is saying what we are all saying!

The longer the changes take, the greater the future currency uncertainty and greater international frictions will be on that road.

As to present realities? Russia is ready to consider using the Russian and Chinese national currencies instead of the dollar in bilateral oil and gas dealings, Prime Minister Vladimir Putin said on Wednesday. On Tuesday Russia and China agreed terms for Russian gas deliveries at a level of up to 70 billion cubic meters a year. China also imports oil from Russia. "Yesterday energy companies, in particular Gazprom, raised the question of using the national currency. We are ready to examine the possibility of selling energy resources for rubles, but our Chinese partners need rubles for that. We are also ready to sell for the Yuan," Putin said. The Russian prime minister said the issue would be addressed among others at a meeting of Shanghai Cooperation Organization finance ministers, who are to convene before the end of the year in Kazakhstan.

The real issue

If oil is not priced in the $, the $'s exchange rate value will drop like a stone. This is because a large proportion of U.S. dollars is used in oil transactions by all countries. Oil producers need a strong $ to get the largest amount of income for their oil. If the € climbs 20% against the $, oil becomes 20% cheaper in Europe. If oil were priced in a 'basket' of the world's most used currencies, oil producers would find protection against one of those currencies weakness. So it makes sense to oil producers to receive other currencies on top of the $.

As to a country whose currency is rising against the $, the oil price they get charged drops so reducing petrol's cost. In many countries the local oil/petrol price is a very newsworthy item.

Hence the exchange rate complication enters the world of commodities. Yes, market forces will shove the $ price of an item up, if the $ falls, but many feel that the $ has no business in the formula at all. If the U.S. $ is sidelined in global matters, international trade would be easier and the rest of the world not burdened with the ailments of the U.S. $. But it is also a power play. For a change of oil currency to take place, without monetary disturbance, it must take a long time together with a willingness, on the part of the U.S., to relinquish such power. Will it?

Relevance to the Gold Price

The concept of a world without one superpower dominant, has always been a temporary situation and one preceded or followed by war. In a world where economics and money dominate, the same principle applies. Whatever happens, uncertainty reigns until Pax Romana or Pax Americana, or any other Pax persists. The difference this time is that the war will be fought in the global economy and in foreign exchanges.

In such a world, national monetary certainty is illusive. It is in this type of world that gold reigns supreme because it is trusted all the world over as being untied to any government. It is the currency that enemies can pay each other in.

So whether rumors are true or not, the environment in which they are taken, seriously defines their relevance. The concept of oil priced in currencies other than the $ will happen, it is simply a case of when. Meanwhile, it is time to get ready for that day. and possibly to an eventual five figures, so long as governments will allow its individuals and institutions to do so?

The Impact on the Gold Price?....
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Julian  D. W. Phillips

Author: Julian D. W. Phillips

Julian D. W. Phillips
Gold Forecaster

Julian D. W. Phillips

"Global Watch: The Gold Forecaster" covers the global gold market. It specializes in Central Bank Sales and details, the Indian Bullion market [supported by a leading Indian Bullion professional], the South African markets [+ Gold shares shares] plus the currencies of gold producers [ Euro, U.S. $, Yen, C$, A$, and the South African Rand]. Its aim is to synthesise all the influential gold price factors across the globe, so as to truly understand the global reasons behind the gold price.
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