China Moving Closer to Taking the Yuan International


China’s move to create a yuan based contract for gold was portrayed by the gold promoters cheering this as their savior, but for all the hype, the mere fact that gold will trade in yuan was neither bullish for gold nor any means of displacing the dollar. What this development does is effectively provide a way to hedge the yuan, for playing a yuan contract on the same commodity expressed in dollars is a de facto currency futures contract. You can buy in dollars and sell in yuan if you are bearish in the yuan or vice versa. As long as it is the same underlying commodity then the net difference becomes a way of just trading the currency.

From a gold perspective, this is simply a means to allow the Chinese to sell gold as a hedge. It will by no means alter the trend as we are seeing. What this may do (hopefully) is expand liquidity for gold, but that is also to the downside. Gold is declining worldwide thanks to increased regulations hunting assets, especially assets that are movable such as gold and collectibles in Europe.