The Implications Of China Paying In Gold +

Dear CIGAs,

The implications of China paying for Iranian oil in gold is the most important event in the modern history of gold

1. It is reasonable to assume that China has been threatened with total or at least selective exclusion from the SWIFT system if it pays in any currency for Iranian oil.

2. Gold has been decided by China as the means of making payment for massive international purchases free of the SWIFT system.

3. Other Asian and Middle Eastern nations will now see the gold they hold as money free of Western economic interference.

4. Gold now is not only money free of liability, but also free from interference regarding settlement by the long arm of Western influence.

5. The SWIFT system is becoming ever more a weapon of Western international political will.

6. In case of war anywhere, it is now demonstrated for all to see that only gold will buy the materials required. Paper currencies are under the SWIFT system’s control in settlement.

7. Far from being a barbaric relic, gold is now clearly the money of state survival in every sense.

8. It is reasonable and possible for the supply of physical gold to fall far behind the size of the massive short positions now common to algorithm and hedge fund paper shorts. That will make an effective cover at a reasonable price as compared to a certain day’s close impossible the following day on an exogenous event.

9. It may not be possible to use TA of any nature to determine a price of overvaluation for gold. Should the USA decide to take on China in full out economic war with the physical market totally illiquid, such as through isolation from the SWIFT system, consider the gold price that might result.

by Jim Sinclair in the category General Editorial

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Additional:
Gordon G. Chang

Beijing is planning to avoid U.S. financial sanctions on Iran by paying for oil with gold.  China’s imports of the metal are already large, and you can guess what additional purchases are going to do to prices.

On the last day of 2011, President Obama signed the National Defense Authorization Act for Fiscal Year 2012.  The NDAA, as it is called, attempts to reduce Iran’s revenue from the sale of petroleum by imposing sanctions on foreign financial institutions conducting transactions with Iranian financial institutions in connection with those sales.  This provision, which essentially cuts off sanctioned institutions from the U.S. financial system, takes effect on June 28.

The NDAA gives the president the power to waive the sanctions depending on the availability and price of supplies from non-Iranian sources.  He can also exempt financial institutions from countries that have significantly cut back purchases of Iranian petroleum.  Last month, the State Department announced waivers for Japan and ten European countries.  China, which has received American waivers in the past under other Iran legislation, is now Tehran’s largest oil customer and investor as well as its largest trading partner.  Given the new mood in Washington, Beijing cannot count on getting more exceptions in the future.

As the Wall Street Journal noted in early January, the sanctions are “an attempt to force other countries to choose between buying oil from Iran or being blocked from any dealings with the U.S. economy.”  The strict measures put Chinese officials in a bind.  They apparently believe their geopolitical interests align with those of Tehran, but their economy is becomingincreasingly reliant on America’s.

So how can Beijing keep both Iran’s ayatollahs and President Obama happy at the same time?  Simple, the Chinese can avoid the U.S. sanctions through barter.  China has already been trading its produce for Iran’s petroleum, but there is only so much gai lan and bok choy the Iranians can eat.  That’s why Iran is also accepting, among other goods, Chinese washing machines, refrigerators, toys, clothes, cosmetics, and toiletries.

The barter trade works, but Iran needs cash too.  As it is being cut off from the global financial system, the next best thing is gold.  So we should not be surprised that in late February the Iranian central bank said it would accept that metal as payment for oil.   Last year, China imported $21.7 billion in Iranian oil and exported $14.8 billion in goods and services.  As the NDAA goes into effect, look for Beijing to ship gold to Iran to make up the difference.

Gold bugs, however, shouldn’t get too happy about Iran’s plight.  There are five principal factors that will depress anticipated demand for gold used to buy Iranian oil.  First, other countries will also be bartering agricultural and manufactured goods.  Russia and Pakistan, for instance, will undoubtedly continue wheat-for-petroleum arrangements.

Second, Tehran, out of apparent desperation, in February said it would also accept local currencies, thereby avoiding the U.S. financial system.  As a result, the Indians announced in January that they would not request a waiver from the Obama administration, and they began opening rupee accounts to pay for as much as 45% of their oil purchases with their currency.  In 2011, India exported only $2.7 billion to Iran while buying $9.5 billion in oil.  Similarly, the Chinese, smelling blood in the water, will surely press the Iranians to accept the non-convertible renminbi.

Third, the result of sanctions is that Iran’s oil exports could be cut by as much as 700,000 barrels a day.  China, for instance, is increasing its oil purchases from Saudi Arabia, its largest foreign supplier.  The Chinese are also buying more from the Persian Gulf emirates as well as Vietnam, Russia, and Africa.  Of course, every drop of other crude decreases China’s demand for Iran’s.

Fourth, China and other countries are taking advantage of Iran’s plight by negotiating large price reductions.

Fifth, if the Iranians are willing to accept wheat and non-tradable currencies in payment for oil, there is nothing to say they won’t start agreeing to silver too.

But nothing shines like gold.  And there is one other reason to be bullish on the yellow metal.  “This isn’t the end of the road,” noted an unnamed senior administration official to the Wall Street Journal days after the enactment of the NDAA.  “There are many other sanctions we can put in place and that our multilateral partners around the world can put in place and will be.”  As Washington tightens financial measures against Iran, the mullahs will have less access to hard currency and therefore more need for gold.

Unless, of course, they want to accumulate more Chinese washing machines.

I thank “straightarrow,” a reader of this column, for alerting me to this issue.

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