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Contrarian Thoughts on the Petro-Yuan and Gold-Backed Currencies

Contrarian Thoughts on the Petro-Yuan and Gold-Backed Currencies

Rather than cheer the concept of a new currency, we’re better served to look at the velocity of that currency and the cycles of investing that currency in assets denominated in that currency for a low-risk return.

Longtime readers know not to expect me to rubber-stamp anything, be it the status quo or proposed alternatives. Our interests are best served by screening everything through the mesh of independent analysis, a.k.a. contrarianism. Which brings us to the two sources of alt-media excitement in the currency space, the petro-yuan and another wave of proposed <i<>gold-backed currencies.

I’m all for competing currencies. The more transparent and open the market for currencies, the better. In my view, everyone should be able to buy and trade whatever currencies they feel best suits their goals and purposes.

In all the excitement over de-dollarization, some basics tend to get overlooked.

1. The yuan remains pegged to the US dollar, so it remains a proxy for the USD. It will only become a true reserve currency when China lets the yuan float freely on the global FX market and yuan-denominated bonds also float freely on global bond markets. In other words, a currency can only be a reserve currency rather than a proxy if the price and risk of the currency is discovered by global markets, not centralized monetary/state authorities.

2. Most commentators stop on first base of the oil-currency cycle: China buys oil from exporting nations by exchanging yuan for oil. So far so good. But what can the oil exporters do with the yuan? That’s the tricky part: the petro-yuan has to work not just for China but for the oil exporters who will be accumulating billions of yuan.

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