Gordon Chang: China will buy gold to pay for Iranian oil
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Submitted by cpowell on 07:39PM ET Sunday, April 22, 2012. Section: Daily Dispatches
The Best Reason in the World to Buy Gold
By Gordon Chang
Forbes.com
Sunday, April 22, 2012
http://www.forbes.com/sites/gordonchang/2012/04/22/the-best-reason-in-th...
Beijing is planning to avoid U.S. financial sanctions on Iran by
paying for oil with gold. China's imports of the metal are already
large, and you can guess what additional purchases are going to do to
prices.
On the last day of 2011 President Obama signed the National Defense
Authorization Act for Fiscal Year 2012. The NDAA, as it is called,
attempts to reduce Iran's revenue from the sale of petroleum by imposing
sanctions on foreign financial institutions conducting transactions
with Iranian financial institutions in connection with those sales. This
provision, which essentially cuts off sanctioned institutions from the
U.S. financial system, takes effect on June 28.
The NDAA gives the president the power to waive the sanctions
depending on the availability and price of supplies from non-Iranian
sources. He can also exempt financial institutions from countries that
have significantly cut back purchases of Iranian petroleum. Last month
the State Department announced waivers for Japan and 10 European
countries. China, which has received American waivers in the past under
other Iran legislation, is now Tehran's largest oil customer and
investor as well as its largest trading partner. Given the new mood in
Washington,
Beijing cannot count on getting more exceptions in the
future.
As The Wall Street Journal noted in early January, the sanctions are "an
attempt to force other countries to choose between buying oil from Iran
or being blocked from any dealings with the U.S. economy." The strict
measures put Chinese officials in a bind. They apparently believe their
geopolitical interests align with those of Tehran, but their economy is
becoming increasingly reliant on America's.
So how can Beijing keep both Iran’s ayatollahs and President Obama happy at the same time?
Simple, the Chinese can avoid the U.S. sanctions through barter.
China has already been trading its produce for Iran's petroleum, but
there is only so much gai lan and bok choy the Iranians can eat. That's
why Iran is also accepting, among other goods, Chinese washing machines,
refrigerators, toys, clothes, cosmetics, and toiletries.
The barter trade works, but Iran needs cash too. As it is being cut
off from the global financial system, the next best thing is gold. So we
should not be surprised that in late February the Iranian central bank
said it would accept that metal as payment for oil. Last year China
imported $21.7 billion in Iranian oil and exported $14.8 billion in
goods and services. As the NDAA goes into effect, look for Beijing to
ship gold to Iran to make up the difference.
Gold bugs, however, shouldn't get too happy about Iran's plight.
There are five principal factors that will depress anticipated demand
for gold used to buy Iranian oil. First, other countries will also be
bartering agricultural and manufactured goods. Russia and Pakistan, for
instance, will undoubtedly continue wheat-for-petroleum arrangements.
Second, Tehran, out of apparent desperation, in February said it
would also accept local currencies, thereby avoiding the U.S. financial
system. As a result the Indians announced in January that they would not
request a waiver from the Obama administration, and they began opening
rupee accounts to pay for as much as 45% of their oil purchases with
their currency. In 2011 India exported only $2.7 billion to Iran while
buying $9.5 billion in oil. Similarly, the Chinese, smelling blood in
the water, will surely press the Iranians to accept the non-convertible
renminbi.
Third, the result of sanctions is that Iran's oil exports could be
cut by as much as 700,000 barrels a day. China, for instance, is
increasing its oil purchases from Saudi Arabia, its largest foreign
supplier. The Chinese are also buying more from the Persian Gulf
emirates as well as Vietnam, Russia, and Africa. Of course, every drop
of other crude decreases China's demand for Iran's.
Fourth, China and other countries are taking advantage of Iran's plight by negotiating large price reductions.
Fifth, if the Iranians are willing to accept wheat and non-tradable
currencies in payment for oil, there is nothing to say they won't start
agreeing to silver too.
But nothing shines like gold. And there is one other reason to be
bullish on the yellow metal. "This isn’t the end of the road," noted
an unnamed senior administration official to The Wall Street Journal
days after the enactment of the NDAA. "There are many other sanctions we
can put in place and that our multilateral partners around the world
can put in place and will."
As Washington tightens financial measures
against Iran, the mullahs will have less access to hard currency and
therefore more need for gold.
Unless, of course, they want to accumulate more Chinese washing machines.
