Is Saudi Arabia Selling Oil To China For Gold?

By Jan Nieuwenhuijs of

Gainesville Coins

Rumors have been spreading that Saudi Arabia sells oil at yuan and converts it into gold on Shanghai International Gold Exchange.

This would be logical, as many parts of the globe want to move away from the dollar. However, the renminbi cannot be used as a currency for reserve purposes. China has a closed account for capital and weak law. The renminbi could be used as a trading currency, and the gold revenue from the SGEI could be converted into yuan. According to the rumor, Saudi Arabia buys 1 Kg gold bars because there is little trading of 12.5 Kg on the SGEI. One of the benefits of 1 kg bars is that they're more suitable for fully allocated trading.

Saudi Arabia is one of the largest producers of crude oil in the world.

In 2014, the SGEI was created to allow foreigners access to gold trading in China on the Shanghai Gold Exchange Main Board and on the International Board of the Shanghai Free Trade Zone. The SGEI was set up in 2014 to allow foreigners access to the Shanghai Gold Exchange Main Board and International Board of the Chinese domestic gold market, and trading on both boards within the Shanghai Free Trade Zone (SFTZ).

This has almost no impact on China's balance of payments. It is similar to the offshore gold trade in US dollars that takes place in London. The SGEI is China's attempt to boost the renminbi's role in the global economy.

This is an old overview of trading privileges for domestic and foreign clients at the Shanghai Gold Exchange (I). Source: Spot Trading Rules. I cannot find an updated version of this overview on SGE(I)'s website but I do not expect that the essentials have changed. You can see that the SGEI is an International Board, and the SGE is a Main Board. Both exchanges are under the same umbrella.

Foreigners have limited investment options in Chinese financial assets, but they can convert yuan to gold via the SGEI without restrictions. In a future article, I will elaborate on the Chinese gold market's mechanics because it will be crucial in the years to come in terms of de-dollarization.

Christopher Wood, from Jefferies, mentioned last week in a note the Saudis may be converting the yuan to gold on the SGEI. (full notice

Pro Subs can find it in the usual location

):

Source: Chris Wood, Jefferies

I would expect Saudi Arabia to purchase large 400-ounce (12.5 Kg) bars if they converted yuan on the SGEI. The SGEI and SGE data show that there have been virtually no 12.5 Kg bar transactions since October 2002, when the SGE was established.

Weekly Shanghai Gold Exchange trading volume (12.5 Kg contracts)

The chart above shows the volume of exchange trading for 12.5 Kg contracts. Over-the-counter trading (OTC) in the 12.5 Kg contracts on the International Board has been zero for the last year. OTC trading for the 12.5 kg Main Board contract is not reported. This makes me believe that it doesn't exist. Overall, the volume of large bars traded on SGE(I), is very low.

It's difficult to prove that the rumor, based on the 12.5 Kg trading volume of the SGE(I), is true. However, it doesn't necessarily mean it can't. Saudi Arabia is also able to buy 1 Kg bars from the SGEI and SGE but not on the Main Board. The trading of 1 Kg contracts is still active on both the SGEI and SGE. Although there hasn’t been an increase in iAu9999 trading recently, it is still a healthy level.

Weekly Shanghai Gold Exchange trading volume (1 Kg contracts)

According to my sources, the foreign exchange market in China (

CFETS

All gold is cleared and settled through the SGE. It is also fully allocated. The SGE contracts of 1 Kg (9999 fine), 3 Kg (9995) and 5 Kg (99995) are the underlying assets. The underlying asset for gold trading in the western foreign exchange market is typically the

LBMA Good Delivery

Unallocated bar that is approximately 400 ounces in weight, makes it easier to trade. Unallocated, it is possible to exchange exactly 20,000-ounces in London, but difficult to collect large bars weighing precisely 20,000-ounces. Maybe Asia has shifted to a different benchmark, and this is why Saudi Arabia buys 1 kg bars. Time will tell.

Xi Jinping visited Saudi Arabia, the President of People's Republic of China in December 2022, where he promised to continue purchasing oil and gas.

Gulf Cooperation Council

The GCC nations and proposed that these trades be settled in Yuan.

From Xi

:

China will continue to purchase large amounts of crude oil and liquefied gas from the GCC. It will also expand its imports of LNG, and strengthen its cooperation with other countries in upstream oil and natural gas development, engineering, storage, transportation, and refining. The Shanghai Petroleum and National Gas Exchange can be used to settle oil and gas transactions using yuan.

Saudi Arabia announced that it was open to discussing trade in currencies other the US dollar in January 2023.

According to the Kingdom's Finance Minister

.

You can also find out more about the following:

Wall Street Journal

In March 2023, it was reported that Saudi Arabia and Beijing were in talks to price some oil sales in yuan.

Both countries are expressing a desire to move away from the dollar. It would make sense to sell oil for yuan, and then convert those yuan into gold. This is because the renminbi has a limited role as a reserve. But I'd like to see some more evidence before I confirm this trend.

Several months ago, I was told by a source familiar with the issue but who preferred to remain anonymous.

Saudi Arabia buys gold covertly

He did not reveal where the item was purchased. De-dollarization doesn't happen overnight. Perhaps Saudi Arabia is slowly working towards a transition.