Gold and The Yuan Love Affair
Identified in 2017, bizarrely stronger in the trade war.
Backing up for longer term view: 2017 is the beginning
Further weakness in CNY could then be seen as an escalation of the trade war between the US and China. At the same time, it would seem that CNY appears to be tracking gold closer than any other currency market. Whether this is a ploy to increase the credibility of the CNY by linking it to a credible anchor (perhaps to help internationalization) or just spurious is unclear, but it is worth monitoring.
We believe the “ploy to increase CNY credibility” part is quite real. Since more oil deals are being done in Yuan with Russia, and via our own trading sources, the Chinese have granted call options on gold in their Yuan denominated deals. The problem with this is that tying the Yuan to Gold to satisfy creditors only hurts business with debtors like the US.
We think that China is in between currency overlords. In its attempt to stand separate from the USD and use a de-facto Gold backed currency as a transitionary point to a Petro-Yuan and satisfy the IMF it has made itself vulnerable to the Trade Wars Trump started. Devalued vs the USD helps sales. Devalued vs Gold hurts purchases. We’ve held this position for some time now since the IMF started including the Yuan into the SDR basket.
From a May 2017 post:
It is the stated intent and has been the policy shift for the 3 nations in the headline to begin escalating their oil deals in Yuan based exchanges. This is the beginning of the end of the Petrodollar. As they cut more deals to end the USD dominance as a currency reserve, their words will increasingly publicly contradict those actions. The Chinese need the Yuan to appreciate against the USD for the plan to have maximum effect. And we suspect the more Gold the Chinese accumulate, the more likely that is to happen. And then, the price of oil in USD can drop more, at which point it will not matter.
And then Sept 2017:
I pride myself as a trader who can see the path once secular macro trends are in place. But I missed this one. And it is very upsetting. No trade was missed, no trend was wrong. But the sheer surprise of the East’s speed in implementation now scares me for the working man in the west. What I saw as a test of Blockchain between Russia and China was much further along than originally seen. I missed it. I forgot the other sign, that exchanges do best in regions of demand. Exchanges will accelerate USD death.
Deals are being done, Russia/china oil for gold using Blockchain over the past several months. A few months ago $3b trades that way. And the info I got was that the gold paid to Russia never left the Chinese vault. The lesson learned for me is: what used to be communist bureaucracy throttling progress is now state owned capitalism that makes moves in unison.
China has to dedollarize without trade partners losing confidence in the Yuan. Gold is the transitionary tool for that. If the trade war should end ( it wont really) that would likely cause a major disruption in Oil-Gold-USD correlations which should end with a weaker USD and an end of QT.
Daily Golden Yuan Comps: Breaking Away or Range and Slope
Nov 1: We Correctly Called For Gold Sell-Off or Yuan to Strengthen using the chart above- and may have just been lucky.
On Oct 28th we thought we identified a moment where Gold was bound to regress to its Yuan “peg”. WE were short, advised as much and it did drop. But that did not last long
It would seem to this observer that the Yuan and Gold have become fast friends starting in 2017. More interesting is that the relationship (trading range) has gotten tighter in about April of 2018. So, China has begun to reference 2 competing monetary reserves: The USD as the official reserve currency and their biggest trade partner, and gold as the unspoken backup plan for fiat failure for every central bank, the IMF, and inflation ravaged citizens. We have discussed this many times, specifically that Gold is the bridge for China to get off the USD before the “PetroYuan” is stable enough to dethrone the USD. Look at their new exchange products and Oil for Yuan/Gold deals with Russia to understand this better. Now lets take a look at how the offshore CNY/GOLD is faring with the USD and Gold both holding firm.
Chinese Gold “Peg” breaking down
What to Look for: Regression likely .Yuan not likely to strengthen any time soon. China demand is not increasing. Put this relationship on hold with potential for significant drop in gold if non china drivers correct. do not ignore eastern EU banks buying gold like Poland and Hungary. Trade war resolution would increase China demand for industrial metals first.
Since Then: Gold Says We were Lucky
Gold has again pulled away from our crudely drawn chart
- the peg has been adjusted,
- Gold is revaluing itself up against all paper fiat again,
- this chart fails to factor in volatility,
- Trade War Optimism
- or no-one knows.
For now, note that Gold has once again pulled away decidedly from our “ocular regression” to the Yuan.
Move The Peg et Voila!
The last 75 days line up nicely. But the slope still says gold is likely to go lower looking daily. Weekly and monthly are different matters