China settled its first LNG trade in yuan; but gold remains the bigger winner in the global de-dollarization trend
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(Kitco News) - The U.S. dollar's role as the world's reserve currency continues to be tested as nations settle commodity trades with the Chinese renminbi.
Tuesday, the Shanghai Petroleum and Natural Gas Exchange announced that it completed its first yuan-settled trade for liquid natural gas between China's National Offshore Oil Corporation and France's TotalEnergies.
According to the exchange, and confirmed by Reuters, 65,000 tonnes of LNG imported from the UAE changed hands. The latest trade deal comes as China tries to establish the renminbi as an international currency.
The trade also came after President Xi Jinping traveled to Saudi Arabia in early December to strengthen economic ties with the Middle East and encourage the region to use the renminbi to settle its oil and gas trades.
Last month, The People's Bank of China signed a memorandum of understanding as the first step in creating a yuan-based clearing system with Brazil.
At the same time, the renminbi has been Russia's defacto reserve currency for the past year since it invaded Ukraine, which prompted Western Nations led by the U.S. to impose harsh economic sanctions, cutting the nation off from Western financial markets.
In a paper published over the weekend in the peer-reviewed Global Policy Journal, Jim O'Neill, former chief economist at Goldman Sachs Group, said that Brazil, Russia, India, China and South Africa should expand and work to counter the U.S. dollar's dominance in global financial markets.
O'Neill, who initially coined the acronym BRIC, said that expanding the association could create a fairer, multi-currency global system.
"The US dollar plays a far too dominant role in global finance," he wrote. "Whenever the Federal Reserve Board has embarked on periods of monetary tightening, or the opposite, loosening, the consequences on the dollar's value and the knock-on effects have been dramatic," O'Neill said in the paper.
Along with O'Neill, many analysts have noted that last year the value of the U.S. dollar rose to a 21-year high, which put significant burdens on nations that had dollar-denominated debt and nearly created a major sovereign debt crisis.
O'Neill's comments are in line with the growing de-dollarization trend in the marketplace. Although the yuan is benefiting from its growing international standing, gold has become a clear winner.
Last week, French Bank Société Générale said that it is maintaining its long gold position in its multi-asset portfolio because of expectations of a weaker U.S. dollar.
The growing de-dollarization trend is the bank's second top call for 2023.
"Dollar's dominance is losing momentum with recent geopolitical events. Global central banks' allocation to gold is already surging," the analysts said.
Not only is SocGen maintaining a 6% allocation in gold in its portfolio, but it also established a 10% cash allocation. It has a 2% weighting to the renminbi within its cash position. Its dollar exposure is 29%, with most of its cash holding 43% in euros.
Analysts, including those at SocGen, noted that Russia's invasion of Ukraine and the subsequent Western sanction has caused the de-dollarization trend to speed up significantly. Analysts note that central banks last year bought a record 1,136 tonnes of gold as they diversified their holdings away from the U.S. dollar.
"The longer the Russia-Ukraine conflict endures, the faster countries not aligned with the west will be willing to isolate themselves from the USD. This will encourage central banks to continue their strong gold purchases," analysts at SocGen said.
At the same time, China's central bank has become one of the leaders in the gold market. It has bought more than 100 tonnes of gold in the last four months.
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In a recent interview with Kitco News, Willem Middelkoop, chief investment officer and founder of Commodity Discovery Fund, said it is only a matter of time before gold prices push above $2,000 an ounce as the world moves closer to a multi-polar currency system.
He said he expects gold's role as the world's reserve currency to be regularly tested.
"When the central bankers start to flee towards gold, that's a very powerful sign that there's a major distrust in the heart of the financial system," he said.
Byron King, precious metals expert at Agora Financial and author of the Whiskey & Gunpowder, said in a recent interview with Kitco News that he also expects gold to establish itself as a global currency.
He noted that gold can create stability and a sense of value for a currency, which China desperately needs as it builds an internationally recognized renminbi.
"Maybe 50% of global trade is settled with U.S. dollar, and maybe 25% is in yuan and maybe 10% in euros and the rest in seashells or something," he said. "When everything is eventually settled up, gold might be the means by which they do the settling up."