Is Saudi Arabia Selling Oil to China for Gold?
Is Saudi Arabia Selling Oil to China for Gold?
Analyzing the shift toward yuan-based oil trading and gold accumulation in the de-dollarization movement
Table of Contents
The Yuan-for-Gold Rumors
Rumors are making rounds that Saudi Arabia is selling oil for yuan, which it converts into gold on the Shanghai International Gold Exchange (SGEI). Such a development would make sense as large parts of the world want to de-dollarize, but the renminbi is not suitable to be used as a reserve currency.
Strategic Logic
- China has a closed capital account
- Weak rule of law limits yuan as reserve currency
- Yuan useful as trade currency only
- Gold conversion provides store of value
Practical Implementation
- Use renminbi for oil trade settlement
- Convert yuan revenue into gold on SGEI
- Purchase 1 Kg bars for easier trading
- Benefit from fully allocated gold ownership
Not using the dollar could be done by using the renminbi as a trade currency and converting yuan revenue into gold on the SGEI. If the rumor is true, Saudi Arabia is buying 1 Kg bars as there is virtually no trading in 12.5 Kg bars on the SGEI. The benefit of 1 Kg bars is that they are more fitting for fully allocated trading.
Market Intelligence
Last week, Christopher Wood from Jefferies mentioned in a note that the Saudis might be converting yuan into gold on the SGEI. This analysis from a major investment bank adds credibility to the circulating rumors about this strategic shift in oil trade settlement.
Understanding Shanghai's Gold Markets
The SGEI was set up in 2014 for foreigners to access gold trading on the Shanghai Gold Exchange Main Board in the Chinese domestic gold market and trading on the International Board in the Shanghai Free Trade Zone (SFTZ).
Main Board (SGE)
Access: Domestic Chinese market participants
Restrictions: Foreigners cannot load-in and load-out gold from Main Board certified vaults
Purpose: Serves China's domestic gold trading needs
International Board (SGEI)
Access: Foreign entities and institutions
Benefits: Can load-in and load-out gold from International Board certified vaults
Location: Shanghai Free Trade Zone (SFTZ)
Foreigner entities can't load-in and load-out gold into and from Main Board certified vaults, but they can load-in and load-out gold into and from International Board certified vaults (and thus import into and export from the SFTZ).
Strategic Objective
The objective of the International Board is to facilitate "offshore" gold trading in renminbi in the SFTZ, which has almost no effect on China's current account. This is comparable to offshore gold trading in US dollars in London. Through the SGEI China wants to increase the role of the renminbi in the global economy.
Investment possibilities for foreigners in Chinese financial assets are limited, but there are no restrictions to converting yuan into gold on the SGEI. This unique access makes the SGEI an attractive option for nations seeking to diversify away from dollar-denominated assets, similar to how investors might purchase physical gold for portfolio protection.
Trading Volume Analysis
If Saudi Arabia would convert yuan into gold on the SGEI, one would expect them to buy large bars weighing 400 ounces (12.5 Kg). Data from the SGE and SGEI, though, reveals there has practically been no trading in 12.5 Kg bars since the SGE was erected in October 2002.
12.5 Kg Contract Trading
- Virtually no exchange trading volume
- Zero OTC trading on International Board
- No reported Main Board OTC activity
- Extremely low overall large bar trading
1 Kg Contract Alternative
- Saudi Arabia could buy 1 Kg bars on SGEI
- Trading in 1 Kg contracts not subdued
- More suitable for fully allocated trading
- Easier to manage and transport
Based on 12.5 Kg contract trading volume on the SGE(I) it's hard to prove the rumor is true, which doesn't mean it can't be true. Saudi Arabia can also buy 1 Kg bars on the SGEI (and SGE, but it wouldn't be able to export gold traded on the Main Board). Trading in 1 Kg contracts on the SGEI (iAu9999) and SGE (Au99.99) is not subdued, though there hasn't been a significant uptick in trading of iAu9999 recently.
Market Structure Insight
Interestingly, in China's foreign exchange market, all gold traded is settled and cleared through the SGE and is fully allocated. This contrasts with Western markets where LBMA Good Delivery bars are often traded on an unallocated basis. This structural difference reflects how gold price discovery mechanisms vary globally.
One of the reasons for this is because the underlying assets are the SGE 1 Kg (9999 fine) and 3 Kg (9995) contracts. In Western foreign exchange markets, the underlying for gold trading is usually the LBMA Good Delivery bar that weighs approximately 400 ounces, which is more convenient to trade on an unallocated basis.
The De-Dollarization Movement
The potential Saudi-China gold arrangement fits within broader global trends toward reducing dependence on the US dollar in international trade. This movement has gained momentum as nations seek financial sovereignty and reduced exposure to dollar-based sanctions.
Dollar System Challenges
- Weaponization of dollar-based sanctions
- US monetary policy affects global markets
- Limited sovereignty in dollar-dependent systems
- Desire for alternative reserve assets
Gold's Emerging Role
- No counterparty risk unlike currencies
- Universally accepted store of value
- Cannot be devalued by central banks
- Historical precedent as monetary anchor
A few months ago, a person familiar with the matter but who prefers to stay anonymous revealed that Saudi Arabia is covertly buying gold, though he refrained from saying where it was bought. Perhaps the Saudis are slowly working on a transition; de-dollarization isn't done overnight.
Strategic Transition
This gradual approach makes sense for major oil producers. Rather than abrupt changes that could destabilize markets, a methodical transition toward alternative settlement mechanisms allows for testing and refinement of new systems while maintaining existing relationships.
Key Events Timeline
Xi Jinping visited Saudi Arabia where he pledged to continue buying oil and gas from Gulf Cooperation Council (GCC) nations, and proposed these trades to be settled in yuan.
"China will continue to import large quantities of crude oil from GCC countries, expand imports of liquefied natural gas, strengthen cooperation in upstream oil and gas development, engineering services, storage, transportation and refining, and make full use of the Shanghai Petroleum and National Gas Exchange as a platform to carry out yuan settlement of oil and gas trade..."
Saudi Arabia shared it's open to discussions about trade in currencies other than the US dollar, according to the kingdom's finance minister. This represented a significant policy shift for the traditional petrodollar system.
The Wall Street Journal reported that "Saudi Arabia is in active talks with Beijing to price some of its oil sales to China in yuan." These discussions indicate serious consideration of alternative settlement mechanisms.
Christopher Wood from Jefferies mentioned in a research note that the Saudis might be converting yuan into gold on the SGEI, providing institutional analysis of the rumored strategy.
These statements tell us there is a will in both countries to de-dollarize. Selling oil for yuan and then converting those into gold would be a logical step, given the renminbi's shortcomings as a reserve currency. But more evidence is needed before confirming this trend definitively.
Investment Implications
Whether or not Saudi Arabia is currently converting oil revenues to gold, the broader trend toward de-dollarization has significant implications for precious metals investors and global financial markets.
Gold Market Impact
- Increased institutional demand for physical gold
- Potential shift from Western to Eastern markets
- Greater emphasis on allocated vs. unallocated trading
- Rising importance of gold price transparency
Portfolio Considerations
- Diversification beyond dollar-denominated assets
- Physical precious metals for sovereignty
- Understanding global silver trends as well
- Allocation to tangible wealth preservation
For individual investors, these macro trends underscore the importance of understanding precious metals as portfolio diversifiers. Whether through physical gold purchases or silver investments, holding tangible assets provides protection against currency debasement and geopolitical uncertainty.
Investment Strategy
As global monetary systems evolve, the role of precious metals as neutral stores of value becomes increasingly relevant. The potential Saudi-China arrangement represents just one example of how nations are seeking alternatives to traditional dollar-based systems.
Perhaps Asia is shifting to an alternative benchmark for gold trading, and that's why institutional buyers like Saudi Arabia might prefer 1 Kg bars over traditional large bars. This evolution in global gold markets reflects broader changes in international monetary relationships.
Future Outlook
While definitive proof of Saudi Arabia's gold accumulation strategy remains elusive, the confluence of geopolitical incentives, Chinese market infrastructure, and public statements from both nations suggests that alternative settlement mechanisms are being actively explored. Time will tell how these developments reshape global commodity and precious metals markets.