Yuan Oil Contract, page-68

Hi Dazed,

I believe that is an excellent question and I will answer it with my take on it, which is only my opinion based on what is probably a crude analysis.

The role of gold in the petro yuan scenario is crucial to a long term play. The major benefit will be to allow there to be confidence in holding yuan. While it is an option that there will convertability for oil contracts to be paid in gold at a specified percentage rate I believe the logistics will make it less than practical. However once the conversion to gold has been tested and proved several times then the confidence for those holding yuan will be established. This will negate the need to convert to gold as using a currency is more practical in most respects and this in turn will create similar advantages for China as is currently enjoyed by the USA.
China can pay for oil/energy with yuan. Regardless of whether China just prints up the money or uses its own reserves the belief that it can be converted to gold will mean it is seen as a valuable and in demand currency. As long as China never defaults on conversion to gold as required, then its currency will be deemed as strong. This is the key factor because it will essentially allow China to print and buy its energy for virtually nothing.
The energy exporting countries will therefore be encouraged to trade with China and buy goods from there as they will be holding large quantities of Yuan. To those countries it will be like buying goods at wholesale prices from China to the tune of whatever is the profit margin above the extraction, labour and shipping costs.
Theoretically this means that there will ultimately be great faith in the yuan and a reduced belief in the value of the dollar whilst also creating demand for Chinese products.

The role of gold in all this is to create confidence. I do not think that China will want to pay for energy with gold because it wouldn't take too long to deplete its gold holdings but as long as the knowledge exists in the marketplace of the convertability then the job is done. China benefits mightily from this scheme whilst giving the USA a bit of a black eye.

I believe this scheme is indicative of future trends in backing currency with monetary metals. Those countries with substantial gold holdings who offer a convertability of currency to gold will be the big winners. They can keep the printing presses running and still keep inflation to a minimum. Belief in the value of something is as good as actual value. If they ever get in trouble then just reset the value of gold higher.

Summation:
An increase in demand for gold with an upward price movement. A large decrease in the value of the US Dollar.