by | Jul 8, 2023 | Precious Metals

Last Updated: July 8, 2023

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In a move expected to fuel the ongoing de-dollarization trend, the BRICS nations (Brazil, Russia, India, China, and South Africa) have announced plans to introduce a new trading currency backed by gold. The official announcement is slated to take place during the BRICS summit in South Africa in August. 

This development comes as central banks worldwide have been increasing their gold reserves to diversify away from the U.S. dollar—especially those belonging to the BRICS nations. In fact, the Chinese and Russian central banks have purchased no less than 130 tons of gold in Q1 and Q2 2023 alone. In 2022, global central banks added at least 400 tons to their reserves. 

Source: US Global Investors

Analysts view the potential gold-backed currency as a significant step toward challenging the dominance of the U.S. dollar and increasing the international credibility of the Chinese yuan. Geopolitical uncertainty stemming from the U.S. government’s use of the dollar as a weapon against Russia’s actions in Ukraine has also contributed to the interest in alternative currencies.

What the Experts Have to Say

While this announcement is expected to bolster the price of gold, experts anticipate that the market impact will take time to materialize. Thorsten Polleit, Chief Economist at Degussa, points out that while a gold-backed currency sounds promising, the key lies in the details. To truly establish the new currency as sound money, it must be convertible into gold on demand. Polleit questions whether this is the intention of the BRICS nations and emphasizes the need for more information.

Another possibility suggested by Polleit is the creation of a new bank for financing foreign trade that requires holding gold as capital. This bank could issue the new currency and provide financing loans to exporters or facilitate the sale of BRICS exports against the new currency or gold.

While the gold-backed currency proposal has the potential to support gold in the long run, short-term challenges persist. Naeem Aslam, Chief Investment Officer at Zaye Capital Markets, highlights that the world is still far from seeing a gold-backed currency. Nevertheless, positive news related to this development could bolster the gold price.

Although skeptics, such as Marc Chandler, Managing Director of Bannockburn Global Forex, doubt the feasibility of the BRICS nations having enough gold to back the currency meaningfully, discussions about challenging the U.S. dollar’s status as the world’s reserve currency have been ongoing. Former Goldman Sachs chief economist Jim O’Neill has previously argued that a BRICS currency could bring stability to the global economy and address the destabilizing impact of the U.S. dollar’s dominance.

As the gold market reacts to this news, traders will also closely monitor upcoming inflation risks and U.S. CPI data for short-term price direction. While the full implications of a gold-backed currency remain uncertain, the announcement underscores the growing quest for alternatives to the U.S. dollar and sets the stage for potential shifts in the global monetary landscape.

BRICS, Dedollarization, and the Role of a Gold-Backed Currency

BRICS countries have expressed a keen interest in de-dollarization as they aim to reduce their reliance on the U.S. dollar and assert greater control over their economies. 

Several motivations are at play for the BRICS states, including the desire to mitigate vulnerabilities associated with dollar-dominated global financial systems and to enhance economic sovereignty. The upcoming gold-backed common currency within the BRICS bloc is seen as a significant step towards achieving the following objectives.

1. Economic Sovereignty

By reducing dependence on the U.S. dollar, BRICS countries seek to enhance their economic sovereignty and reduce exposure to potential disruptions in global markets. The U.S. dollar’s dominance in international trade and finance can leave nations vulnerable to fluctuations in its value, monetary policy decisions made by the U.S. Federal Reserve, and the potential use of the dollar as a geopolitical tool. 

The BRICS nations aim to strengthen their autonomy by diversifying their currency reserves and promoting the use of alternative currencies, thereby gaining greater control over their monetary policies and economic stability.

2. Trade Facilitation

The introduction of a gold-backed common currency among BRICS countries is expected to facilitate trade within the bloc and minimize currency exchange risks. Currently, cross-border trade between BRICS nations often involves multiple currency conversions, transaction costs, and exposure to foreign exchange fluctuations. 

A gold-backed currency would provide a stable medium of exchange and promote seamless trade settlement in a common currency, reducing transaction complexities and fostering economic integration among BRICS nations. This would enhance intra-BRICS trade, improve economic cooperation, and potentially strengthen the bloc’s position in global trade negotiations.

3. Greater Financial Resilience

A gold-backed currency within the BRICS bloc can bolster financial resilience by providing a hedge against potential currency crises and market uncertainties. Gold has long been viewed as a store of value and a safe haven asset during times of economic turmoil. 

By backing their currency with gold, BRICS countries can instill confidence among market participants, both domestically and internationally, in the stability and intrinsic value of their common currency. This can contribute to increased trust and stability within the BRICS financial systems, attract foreign investment, and potentially reduce their vulnerability to external shocks.

Gold: A Central Role in a De-dollarized Future

Although representatives of the BRICS nations have been scant on details, one thing is for certain: the currency will be pegged to the value of gold. No matter one’s political persuasion, it’s hard to deny the centrality of gold in tomorrow’s global economy. 

BRICS countries’ interest in de-dollarization stems from their aspirations for economic sovereignty, reduced vulnerability to global financial disruptions, and increased control over their monetary policies. The introduction of a gold-backed common currency is a major step forward in achieving that objective. 

The introduction of a gold-backed common currency within the BRICS bloc aligns with these goals by promoting economic integration, enhancing trade facilitation, and providing financial resilience. The currency’s potential to advance the de-dollarization agenda among BRICS nations highlights its determination to shape a more diversified and robust global monetary landscape.

While central banks and BRICS countries are loading up on gold, you may want to consider doing the same. To invest in gold today, consider opening a tax-advantaged gold retirement account with one of America’s top-rated gold IRA companies

 

Liam Hunt

Liam Hunt, M.A., is a financial writer covering global markets, monetary policy, retirement savings, and millennial investing. His commentary and analysis have been featured in the New York Post, Reader's Digest, Fox Business, and Forbes.