Recently Russia and China agreed on a landmark deal that will see Russia’s Gazprom deliver vast quantities of natural gas to China’s National Petroleum Corp (CNPC) over the next 30 years. As a sign as to how important the deal is to both countries Russia’s President Vladimir Putin and his Chinese counterpart Xi Jinping both personally attended the signing ceremony in Shanghai.
Also as part of the talks and functions recently week in Shanghai between the political and business leaders of Russia and China Russia’s second largest bank VTB signed a memorandum of cooperation with the Bank of China specifically about settling bilateral trade between the two countries in either Russian Ruble) and/or Chinese Renminbi.
This agreement may potentially prove to be a seismic event for the world’s currency markets and as a flow on the world’s gold and precious metals markets.
Currently the vast majority of international trade is settled with payments in US Dollars. This is true whether an American entity is a party to the deal or not. For instance an English importer will pay its American supplier US Dollars to settle a transaction but also an Australian importer will pay its German supplier US Dollars to settle a transaction. This use of US Dollars as the preferred settlement method in international trade creates huge demand for the US Dollar.
The agreement between VTB and the Bank of China removes the need for US Dollars to be bought to settle trade between Russia and China. If settling trade between Russia and China in either Rubles and/or Renminbi becomes the preferred method then it will remove a huge amount of demand for US Dollars. With Russia as the world’s largest energy exporter and China as the world’s largest energy importer the sums involved could be massive.
The Presidents of both Russia and China were also present at the signing ceremony between VTB and the Bank of China. This is a good indication as to how determined both countries are to distance themselves from the US Dollar.
Now that the precedent has been set other countries may well follow the example and set up agreements to settle their international trade deals in either their local currency and/or the currency of the other party to the deal, further reducing the demand for US Dollars.
Reduced demand for US Dollars in international trade will have an effect in the world’s currency markets weakening the US Dollar (all things else being equal). Also given that gold and other precious metals are priced in US Dollars via the Spot, Forward and Futures Markets in London, New York and elsewhere any reduction in the demand for US Dollars may likely increase their price relative to the US Dollar.
An investor in Australia may be far away from the massive changes unfolding in Eurasia but they can take advantage of their effects by investing in gold and other precious metals.
Until next time
Managing Director – City Gold Bullion
P.S. Please don’t hesitate if you have any questions, I would be delighted to help.