China's Gold Plan & Why The Gold/Oil Ratio Is Trending Towards 100-1
In a recent podcast episode, Luke Gromen made a case for a stronger CNY, a higher gold/oil ratio, and a higher gold price in both USD and CNY terms
In January, I made the case for China to allow the CNY to strengthen against the USD in combination with a revaluation of gold in CNY terms. As it turns out I was far too conservative in my price expectations. I was speculating about the USD/CNY falling to 6 in conjunction with a gold price of ¥20,000 (this would equate to a US$3,333 gold price). The gold price has already exceeded both levels in USD and CNY terms in 2025, however, the USD/CNY exchange rate remains relatively stable near 7.25.
This indicates to me that before any major currency/trade accord with Trump 2.0, the PBoC would prefer to use market forces to bid gold higher in the near term. That means that the ultimate gold price target is far higher than $3,333 or $3,500 - think 2x those levels, or maybe even more than 2x.
In a recent episode of Macro Voices, Luke Gromen added his take on China’s gold plans and why the gold/oil ratio is a more important gold price target than gold in USD or CNY terms:
“For me, China's goal regarding gold has always been about a defensive nature. In other words, China has has long understood the dollar sensitivity it has, the oil and food sensitivity it has. And what I mean by that is, you know, famously Kyle Bass went on, I think CNBC or something and he said, look, you know, this was probably 2019 and he said, the Chinese import x million barrels of oil per day and oil goes up every year and they have a finite number of dollars and so as they keep growing their economy to support their debt. They're going to have to import more oil and other commodities, and food and all of those are only priced in dollars. And so at some point presumably oil prices keep rising over time. And when they do they're going to eventually run out of dollars. And when they run out of dollars they're going to have a currency crisis like Southeast Asia. And the yuan's going to fall sharply and they're going to have to devalue it. It's going to be a big mess like it was in Southeast Asia in the 1990s. I think China's goal with gold has long been avoiding that outcome and using gold to gain the ability to buy oil and commodities on the margin in yuan, rather than in dollars.
They've been successful in doing that. And I'm not speculating about that. That's the goal with gold. That is specifically what PBoC officials said at a Singapore LBMA meeting. I've got the receipts, back in 2015 they said the goal of China is to internationalize the yuan.
What does that mean? That an internationalized currency has the ability to invoice oil and gas in its own currency. We are using gold to internationalize the renminbi.
So I think the goal has always been with gold with China, has been the ability to buy oil and gas in their own currency, to a lesser extent copper and other commodities on the margin…..
The goal here is to give themselves another lever to be able to manage the yuan dollar cross rate to ensure that they cannot run out of dollars. Because in extremes they can always buy in yuan and adjust the gold rate in yuan to do that; there are times on charts over the last 5 years in particular where you can see that China looks like they used gold effectively to defend the yuan.
So I think tying this all back to your question about what is the right number, I don't think the right focal point necessarily is the price of gold in yuan over time, as much as it is the gold-to-oil ratio over time. Because ultimately with oil being priced in both yuan and in dollars, and at least China offering gold net settlement of any offshore yuan balances that build as a result of them buying some of their oil in yuan. What you end up with over time is a rise in the gold to oil ratio.
So it's fascinating that in 2008 Putin starts buying more, adding more gold reserves. The gold to oil ratio in 2008 was seven barrels an ounce, something like that. So it's seven barrels of oil per ounce of gold. Well last week it was 55 barrels per ounce of gold.
Gold/WTI Crude Oil (Monthly)
So the gold-to-oil ratio in the last 16 years has risen 8x which is an enormous move. I think ultimately as long as you continue to have this multicurrency energy pricing with net gold settlement being provided for by China as they've been talking about for 10 years, you’re going to continue to see a rise in the gold to oil ratio for a simple reason; that is that even though the gold to oil ratio has gone from seven barrels to 55 barrels over the last 15 years, oil is still like eight times bigger than gold with annual production of oil in physical dollar terms versus annual production of gold in physical dollar terms. Oil is still about eight times bigger than than gold.
So my view has long been the gold-to-oil ratio would rise and rise and rise, as multicurrency oil pricing with net gold settlement gains traction.
That's exactly what's happened. And I so I think that one of the gauges of this is that gold-to-oil ratio. I think ultimately the gold/oil ratio is going to continue to rise. It's 55 now. I think it’s going to 100 over time. It might go to 200 over time, maybe even higher.”
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