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Shanghai Gold Exchange may open floodgates to offshore yuan traders

Last week the In Gold We Trust blog, which tracks activity on the Shanghai Gold Exchange to gauge overall Chinese gold demand, reported that for the week of May 19-23, withdrawals from the SGE were at their highest levels since late February, at 36.4 tons.

Expect that figure to become even more robust in the coming months and years. Bloomberg is reporting that the SGE “is proposing to let holders of offshore yuan accounts trade the three contracts it will offer, including bullion of 99.99% purity.”

What are the ramifications? “The gold contracts will expand the range of investment options for yuan deposits around the world, which reached at least 1.5 trillion yuan ($240 billion) in March.”

It’s all part of the SGE’s plan “to establish an international gold trading platform as part of the liberalization of China’s gold markets and to attract foreign institutional and private investors.”

ANZ, one of the foreign banks allowed to bring gold into China, hailed the plan as “a great opportunity” to entice foreign investment to China’s physical gold market.

China isn’t stopping there in its plans to rival the West, especially as it forges new ties with Russia in the wake of tensions over Ukraine. China has long had an alternative ratings agency, Dagong, but now it’s teaming up with Russia to institute a joint rating agency to “reduce its dependence on the U.S. and Europe,” London’s Financial Times reported.

“In the beginning, the agency will assess Russian-Chinese investment projects with a view to attracting of [investors from] a number of Asian countries,” Russian financial minister Anton Siluanov said. “Gradually, based on the progress and authority of such an agency, we believe it will rise to a level where its opinions will attract other countries.”

And in the aftermath of a landmark 30-year deal in which Russia’s Gazprom will supply natural gas to China via Siberian pipelines, “Chinese companies are ready for transactions with Russia in rubles and yuans,” The Voice of Russia reported, citing the TASS news agency.

“The start of transactions in the national currencies must give an impulse to a further development of economic cooperation between Russia and China,” Siluanov said.

All of the above developments are potentially bad news for the long-term health of the U.S. dollar. As these two powerhouse emerging economies join forces, their mutual aim appears to be to drop the greenback wherever possible. That’s a blow to the dollar’s status as a world reserve currency. The use of the greenback by nations worldwide, particularly for energy transactions, has maintained the dollar’s strength and supported the American way of life – and standard of living – for decades.

The move away from the dollar bodes ill for those who would use it as a storehouse of their wealth. Investors might do well to prepare for the potential dire day when the dollar loses its luster as the word’s go-to currency. The one alternative currency that has stood the test of 5,000 years of change and turbulence is gold.