The Gold BRICS

A Coming Threat to US Dollar Hegemony?

If the rumours are correct, August 2023 is slated to see the most important development in international finance since the 1971 Nixon Shock, when in the same month 52 years ago the US came off gold. The BRICS economies (and some 40 ‘friendly’ nations) look set to endorse a new gold exchange standard by using their swelling gold reserves to back (or strictly, partially back) a new international currency unit, so far unnamed.

We argue below that the immediate effects will be felt through higher US funding costs and a likely firmer gold price, with hopefully only a dent suffered to the US dollar’s hegemony.

Yet, it is a wake-up call because the survival of the US dollar-based international monetary system ultimately depends upon the integrity of the US Treasury market. Worryingly, this part is fiat-based and potentially fragile. As noted in Capital Wars (Palgrave-Macmillan, 2020), China is a rival with a clearly stated future goal:

“ …we should promote the Renminbi to be the primary currency of Asia, just

as the US dollar first became the currency of North America and then the currency

of the World … Every globalisation was initiated by a rising empire …

As a rising super power, the ‘One Belt, One Road’ strategy is the beginning

of China’s own globalisation … it is a counter-measure to the US strategy

of shifting focus to the East.” (Excepts from a speech by Major-General Qiao

Liang, Chinese PLA, April 2015)

Hiding the Chinese Yuan within a new BRICS unit may be a clever way of reaching her goal a tad faster? Wolf economic diplomacy in sheep’s clothing, perhaps?

Figure 1: BRICS & ‘Friends’ Vs US Gold Holdings, 2000-2023E, Q3 (Tonnes)

E Estimate

Figure 1 shows the gold holdings of the BRICS economies, plus those of the Shanghai Cooperation Organisation (SCO), and we have added to this the gold reserve of countries that have signalled a future interest in joining the BRICS club. To illustrate the scale of their challenge, the combined gold stock of the BRICS and ‘Friends’ is projected to surpass US gold holding sometime in late-2023. In truth, it may already have happened!

We still figure that the Gold BRICS will have a greater political impact than an economic impact.

It will not change the centrality of the US dollar, nor the dominance of US financial markets and is unlikely to challenge the other bulwarks of the international monetary system, namely the policing of imbalances by the IMF and World Bank and the security underpinning for trade and settlement flows provided by the US military. Savers will still invest in US assets. The bulk of trade will still be denominated in US dollars. Borrowers and lenders will still favour the US dollar. US banking and financial markets will continue to dominate. Even taken collectively, the BRICS economies can offer no equivalent refuge for international capital, nor can they provide credits to rival supplies from US banks. Put another way, the World remains in a regime we have elsewhere dubbed ‘Bretton Woods I’. The legacy financial system devised at the end of WW2 now supports a US$170 trillion global funding system, based around the US dollar, that allows capital to circulate Worldwide.

Nonetheless, the potential economic damage to US interests from a gold-backed BRICS unit must not be entirely dismissed. We can debate whether, or not, it is bearish for the US dollar, but it is unequivocally not bullish. Specifically, its effects will likely be seen in a higher cost for US Treasury debt. It should also help to support the price of gold as the BRICS club expands.