An Unforeseen Challenge for the Global Currency Landscape

There is an ongoing development that poses a potential threat to the dominance of the U.S. dollar in international transactions. The group of countries known as BRICS (Brazil, Russia, India, China, and South Africa) is spearheading this monetary shift, aiming to establish their own currency as a leading medium of exchange and reserve currency in a remarkably short span.

While the process itself bears some similarities to the rise of the U.S. dollar under the Bretton Woods system in 1944 and the subsequent creation of Special Drawing Rights (SDRs) in 1969, it is important to note the distinguishing aspects. What connects these historical events, along with the current BRICS initiative, is the significance of gold.

Unfortunately, the global community is largely unprepared for the potential geopolitical impact this move may have. The rise of BRICS represents one of the most captivating and consequential geopolitical phenomena of the twenty-first century. In addition to the existing BRICS members, there are eight nations actively seeking membership and seventeen expressing interest. Notably, if countries such as Saudi Arabia and Russia become members, the BRICS group would include two of the world’s three largest energy producers, along with the United States.

Furthermore, with the inclusion of Russia, China, Brazil, and India, the BRICS alliance would encompass four out of the seven largest countries in terms of landmass, accounting for 30% of the Earth’s dry surface area and its associated natural resources. Astonishingly, almost half of the world’s wheat and rice production, as well as 15% of global gold reserves, are concentrated within BRICS. Moreover, China, India, Brazil, Russia, and Saudi Arabia collectively contribute to 40% of the world’s population, representing four of the nine most populous nations. In terms of GDP, these five countries generate approximately $29 trillion (nominal global GDP) or over 54% (based on purchasing power parity).

Considering their immense demographic, economic, and resource strengths, the BRICS nations form a formidable alternative to the Western-centric power structure, hinting at the emergence of a multi-polar or even bi-polar world. Consequently, the introduction of a new BRICS currency, backed by gold, is poised to disrupt the existing monetary order.

The desire to reduce reliance on the U.S. dollar in international trade has gained significant traction among BRICS members and their major trading partners. It has now reached a critical juncture, with plans to unveil a new BRICS+ currency at the upcoming annual BRICS Leaders’ Summit Conference in Durban, South Africa on August 22-24, 2023. This pivotal meeting will see the participation of leaders such as President Xi, President Putin, President Lula, Prime Minister Modi, and President Ramaphosa, signifying its significance.

While the initial discussions within BRICS revolved around a currency backed by a basket of commodities like oil, wheat, and copper, the practical challenges of including various global commodities in such a basket became evident. In the past, economist John Maynard Keynes also explored a similar approach, only to realize that anchoring a currency to a single commodity, particularly gold, would be more convenient and uniform.

During the Bretton Woods negotiations, the U.S. Treasury representative, Harry Dexter White, concurred with Keynes’ perspective on using gold as an international currency anchor. However, White insisted on tying the dominant currency to gold, leading to the eventual establishment of the U.S. dollar as the prevailing currency linked to gold. Although the International Monetary Fund (IMF) later created the Special Drawing Right (SDR) as a world currency, anchored to gold, the gold standard was abandoned in 1974, and the SDR has since been tied to a basket of reserve currencies.

Given this historical context and the limitations of commodity baskets as reliable stores of value, it is likely that the new BRICS+ currency will be linked to a specified weight of gold, favoring the gold-rich BRICS members, Russia, and China. As a significant shift looms, it is crucial to recognize that evaluating the impact on the U.S. dollar necessitates looking beyond currency-to-currency comparisons.

In this regard, the true measure of the dollar’s strength lies in the dollar price of gold, as gold itself is not a central bank currency. This realization provides a clear perspective:

Dollar strength can only be accurately gauged through gold valuation. While gold functions as money, it is also a commodity. BRICS nations possess abundant commodities but lack dollar reserves. The forthcoming BRICS+ currency will be linked to gold, highlighting the strengths of Russia and China as major gold producers and reserve holders. Consequently, the anticipated collapse of the dollar will manifest as higher inflation and a considerable surge in the dollar price of gold. This rise will subsequently elevate other commodity prices, akin to the commodity boom witnessed in the late 1970s and early 1980s, favoring the BRICS nations.

The link between the BRICS+ currency and gold, combined with the expanded market potential due to the inclusion of new members, could expedite its adoption as a dominant payment currency, surpassing expectations. The introduction of this gold-backed currency, slated to commence on August 22, 2023, following years of development, will undeniably disrupt the international monetary system, catching many off guard.

Nevertheless, the repercussions for investors will extend well beyond the initial launch of the BRICS+ currency. The ensuing market implications will generate significant turbulence in exchange rates and capital markets for years to come.

Addressing the Impact of BRICS: A Pathway Forward

In the face of these impending changes, it is crucial to understand that gold will maintain a consistent price worldwide. There cannot be two prices for gold; there will only be one, with minor discrepancies accounting for factors such as paper versus physical gold and transaction commissions. Multiple prices within the same currency would rapidly equalize due to arbitrage.

While the gold “price” can be expressed in various currencies such as USD, EUR, or BRICS+, the absolute values in each currency are subject to exchange rates, not differing gold prices.

The BRICS+ currency will be valued based on the weight of gold. The specific valuation is yet to be determined, but hypothetically, BRICS1.00 could equal 1 ounce of gold. Given today’s market conditions, this would equate BRICS1.00 to approximately USD 1970. However, it is crucial to note that this is not a peg; rather, the peg remains fixed at 1.0 ounce. Thus, the BRICS currency will possess a stable value in terms of gold.

Simultaneously, the U.S. dollar will continue to have a floating value in gold, as it has since 1971. Consequently, the BRICS/USD exchange rate will fluctuate based on the respective values of gold in each currency. By employing a transitive law, it is possible to calculate the value of BRICS1.00 in dollars. Nevertheless, this should not be misconstrued as a peg.

This dynamic introduces fascinating implications for investors and their asset allocation strategies. For instance, if the dollar price of gold rises, the value of BRICS1.00 will strengthen against the U.S. dollar. Conversely, if the dollar price of gold declines, the value of BRICS1.00 will diminish relative to the dollar.

BRICS members may have diverging interests in the value of the dollar price of gold. Those seeking to acquire U.S. goods and services at favourable rates may prefer a higher dollar price of gold, whereas commodity-exporting BRICS members may benefit from a lower dollar price to incentivize purchases of their goods. However, such a scenario somewhat undermines the purpose of the BRICS currency, which aims to reduce reliance on dollar-based transactions.

China and Russia are expected to play pivotal roles in determining the course of action. It is likely that they will strive for a higher dollar price of gold to enhance the value of their BRICS currency, bolster their own wealth, and erode confidence in the U.S. dollar.

Supported by substantial gold purchases, this policy direction could propel the dollar price of gold to reach $3,000 per ounce or even higher in a relatively short period. In essence, a surge of this magnitude would signify the collapse of the dollar, aligned with the intentions of the BRICS nations.

As a consequence, the U.S. dollar’s value would diminish both in terms of gold and the BRICS currency, while inflation stemming from this devaluation would erode its purchasing power. Investing in traditional avenues like stocks, bonds, or savings accounts denominated in dollars would not shield one from these effects.

Fortunately, there is a straightforward solution to weather the upcoming currency crisis: acquiring gold. By purchasing gold, individuals can preserve their wealth and safeguard against inflation. If the need for cash arises, the gold can be sold, yielding a higher return than the initial investment. This approach aligns with the strategies employed by the BRICS nations and presents an opportunity for individuals to join the BRICS movement with gold as a protective asset.