The clock is ticking for the U.S. dollar as the world’s reserve currency. BRICS, a coalition of Brazil, Russia, India, China, and South Africa, is nipping at its heels, looking to upend its dominance and the world order at that. How? It all revolves around a new gold-backed currency.
If the organization didn’t have the world on notice, it does now. During last week’s 2-day summit in Johannesburg, the organization more than doubled after adding six member nations and extended invites to regional powers Saudi Arabia and Iran. The potential "irreversible" transition away from the U.S. dollar, as Russian leader Vladimir Putin said, is officially underway.
What could this mean for gold and the financial system as we know it?
BRICS's Statement-Making Moves
Between August 22 and 24, 2023, Johannesburg hosted leaders from Brazil, Russia, India, China, and South Africa for the 15th BRICS Summit. But this year's assembly was far more than any ordinary meeting. It served as more of a statement for the Western world to pay attention to.
A Bigger and Bolder BRICS?
The biggest takeaway from the meeting was BRICS expanding by six nations: Argentina, Indonesia, Mexico, Turkey, Egypt, and Nigeria. While these new additions bolster BRICS's strength numbers-wise, they also enhance their cultural, economic, and strategic footprint. Extending invites to influential regional players like Saudi Arabia and Iran further signals the body’s steadfastness in competing with long-standing U.S. supremacy.
Why Expand Now?
The main reason BRICS decided to expand was power. Emerging markets simply want a bigger slice of the pie and say in world affairs. When you consider their global footprint in terms of size and population and how much influence they have, they do not believe they have a fair shake. Thus, by expanding, BRICS believes it can truly disrupt the world order and redistribute power. Moreover, with the U.S. showing its vulnerabilities and international bodies like the WTO, World Bank, and IMF losing influence, BRICS sees an opening.
The Future of Gold in the Shadow of BRICS
BRICS's vision of a gold-backed currency to de-dollarize is as intriguing as it is controversial. While many believe it remains far-fetched and distorted from reality, the recent moves at the BRICS summit say otherwise.
If everything goes as planned, what could be the consequences?
Higher Gold Demand and Threats to U.S. Dominance
For this BRICS gold-backed currency to actually work, BRICS nations will need to maintain a substantial amount of gold reserves. We’re not there yet. But consider a few insights as to why this has a better chance of succeeding than you think:
- China increased its gold reserves by 21 tons in June 2023.
- Russia’s tripled its gold output over the last 20 years and could soon overtake China as the world’s top producer.
- BRICS gold supply could collectively surpass the U.S.’s before the end of the year.
Needless to say, if this plan successfully moves forward, the catalysts pushing gold’s price higher could be manifold. Higher demand could lead to higher prices, and central banks wanting to join the organization could buy the yellow metal more aggressively. Willem Middelkoop, founder of the Commodity Discovery Fund, for one, seems to think a gold rally from these catalysts is plausible.
Negative Impacts on the U.S. Economy
A gold-backed BRICS currency not only could challenge the U.S. dollar's dominance but also cause negative ripples throughout the U.S. economy. Consider the effects it could have on U.S. government bonds.
These investment vehicles are considered the safest in the world. But if the dollar loses value, so could these treasuries. If this happens, it could lead to higher interest rates and inflation in an already red-hot environment. When the safest assets can no longer provide the safety they once did, gold’s appeal as a safe haven and hedge will only grow.
BRICS is feeling more powerful than ever these days, and is understandably taking a victory lap following the Johannesburg summit. While their goals are bold and brash, and it will be easier said than done to take on the U.S. dollar, expanding in size and strength is a genuine statement of their seriousness.
With gold backing this currency and its already present qualities as a hedge against currency instability and economic headwinds, this “crisis commodity” stands to be the biggest beneficiary of them all.