A gold-backed currency by the BRICS union – how far along is the process, and what are the potential implications?

02.08.2023 12:09|Investment Advice Department, Conotoxia Ltd.

Opposition towards the US dollar has become stronger than ever due to numerous geopolitical events in the past few years. A logical step for countries objecting to the US dominance in the global arena might be to offer an alternative to one of its instruments – the US dollar. The BRICS union with Russia and China in the leading role has commenced a process in this direction. While there are still numerous uncertainties about a potential new BRICS currency, this article discusses the possible forms of the currency and its impacts on the US dollar and gold. 

Summary 

  • BRICS nations have been actively looking for ways to reduce the reliance on the US dollar, mentioning the reasons for the US weaponising the reserve currency and it being a source of uncertainty and instability in the world economy.
  • The upcoming BRICS summit in August may be where the union announces a new BRICS currency allowing member states to trade without using the US dollar. 
  • Establishing such a multinational currency would take time and resources but holds the potential to diminish the US dollar's dominance as the reserve currency.
  • If the new BRICS currency is backed by gold, it may have a considerable impact on the future price of gold due to increased demand and other external factors. 
  • The US dollar may feel pressure if more countries join the BRICS union and/or start using the BRICS currency as an alternative for international transactions. 

Opposition towards the US dollar

According to the Bank of International Settlements Triennial Survey for 2022, the US dollar was a part of 88% of OTC FX transactions and accounted for 58% of foreign exchange reserves globally. This may be just one example arguing for the US dollar's global dominance. 

However, amid a changing global geopolitical landscape challenging traditional Western dominance, the BRICS nations have been actively pursuing diverse measures to reduce their reliance on the US dollar. In the past year, Russia, China, and Brazil have increased the use of non-dollar currencies for cross-border transactions. Additionally, countries like Iraq, Saudi Arabia, and the United Arab Emirates are earnestly exploring alternatives to the US dollar, while central banks are reallocating their currency reserves to include more gold. Furthermore, increasing interest rates and the recent US debt-ceiling crisis have sparked anxiety among other nations regarding their dollar-denominated debt and the potential collapse of the US dollar in the event of a default by the world's leading economy.

Each of the BRICS countries has its own reasons for criticising the dominance of the US dollar. Russian officials are advocating de-dollarisation to soften the blow of sanctions that have restricted the use of SWIFT, the global messaging system that facilitates banking transactions, and led to the West freezing of Russia's 330 billion USD reserves.

The 2022 Brazilian election saw Luiz Inácio Lula da Silva's return as president, a long-time supporter of the BRICS alliance, consistently seeking to diminish Brazil's dependence on and vulnerability to the US dollar. Lula's leadership reignited the group's commitment to de-dollarisation and initiated discussions about creating a new currency akin to the euro.

The Chinese government has also expressed clear concerns about the US dollar's dominant position, labelling it "the main source of instability and uncertainty in the world economy." Beijing explicitly attributed turmoil in the international financial market and depreciation of other currencies to the Federal Reserve's interest rate hikes. Alongside other BRICS nations, China has also condemned using sanctions as a geopolitical tool.

The BRICS and its upcoming summit

BRICS denotes a coalition of emerging economies that have undergone significant growth and seek to contest the prevailing Western influence on the global stage. This alliance includes Brazil, Russia, India, China, and South Africa, collectively wielding substantial power in the global economy. Together, the BRICS nations hold considerable strength in terms of population, landmass, GDP, natural resources, and nuclear capabilities. Moreover, the group is currently exploring the possibility of broadening its membership, as numerous – currently 41 – countries have expressed their interest in joining the coalition.

Scheduled for 22-24 August 2023 in Johannesburg, South Africa, the 15th BRICS summit is expected to be the platform where its member states announce a gold-backed digital currency with the key aim to reshape the international payments landscape and diminish its concentration on the US dollar. 

Is a new BRICS currency an easy goal?

Establishing a well-regulated currency, especially a multinational one, requires a lot of effort, starting with a consensus among all member countries on an exchange rate mechanism, an efficient payment system and a well-regulated and stable financial market. In addition, the current BRICS members, not to mention the 41 countries that have expressed interest in joining, have complex political dynamics and significant economic power asymmetries, which further complicate the process. 

While the most popular example of such a multinational currency is the euro, there might be a small chance that the BRICS aims to introduce its own version firstly because the participating countries are not planning to abandon each of their own local currencies. Instead, the current idea for an initial step is to establish an integrated payment system for cross-border transactions that would allow its members to transact without using US dollars. The first building block in this direction was already launched in 2010 when the BRICS Interbank Cooperation Mechanism was introduced to facilitate cross-border payments in local currencies between BRICS banks. 

While the upcoming BRICS summit may shed some light on all the uncertainties surrounding the BRICS currency, it should be clear that this is neither a near nor an easy goal to achieve. It may take years to establish a new currency and even longer for it to become a worthy rival to the US dollar as a reserve currency. Nevertheless, any progress in this direction could have an impact on the strength of the BRICS union and the US dollar as the world's most dominant currency.  

How much gold do the BRICS countries hold?

As of May 2023, the combined BRICS central bank gold holdings accounted for over 15% of all gold reserves held by central banks around the world. According to the World Gold Council, by the end of the first quarter of 2023, three of the five BRICS founding countries were on the list of top 10 gold holders. Russia held the fifth largest gold reserves in the world – 2,326.52 tons of gold –which was 24.90% of their total national reserves. China held the sixth largest gold reserves in the world with 2,068.36 tons, but due to its enormous value of total reserves (3,378,906.67 million US dollars), their gold holding accounts only for 3.90% of their total reserves. China holds the largest total reserves in the world, more than doubling the second-largest reserves owned by Japan. India is in ninth place with 794.62 tons and 8.66% of its total reserves. 

Source: https://www.gold.org/goldhub/data/gold-reserves-by-country 

How may the BRICS currency impact gold? 

To discuss the potential impact of the new BRICS currency on gold, it may be crucial to recognise two scenarios. The most discussed scenario assumes that the new currency would be backed by gold, while the other version implies that the national currencies of each member state of BRICS would back the new currency.

Let us first look at the scenario of the new currency being backed by gold. In such a situation, it might be safe to assume that all BRICS member states may be obliged to hold a certain amount of gold in their reserves to ensure the stability and reliability of the new currency. While it is hard to predict the specific amount of gold accumulated among all member states for such a purpose, the total demand for gold may increase considerably. Another factor affecting the demand for gold would be the number of countries willing to join BRICS and start using the new currency. Currently, there is a list of 41 countries that have expressed interest in joining the union in addition to the five founding member states. More countries joining the common currency union would lead to higher demand for the new currency and larger gold reserves, respectively. Increased demand may impact higher gold prices in the long term. Other external factors may also increase the gold price, such as the potential depreciation of the US dollar because of the new common currency, which holds the potential to become an alternative to the current reserve currency.

If the new BRICS currency is not backed by gold, the precious metal may not be as affected compared to the above-reviewed scenario. Any changes in the price of gold may be more related to the US dollar and its future as a reserve currency. 

How may the BRICS currency impact the US dollar? 

The potential implications of introducing a new BRICS currency on the US dollar remain uncertain, sparking debates among experts about its ability to challenge the dollar's dominant position. If the BRICS currency were to stabilise against the US dollar, it might weaken the effectiveness of US sanctions, leading to its potential devaluation and an economic crisis that could impact American households.

A new common currency could also accelerate the ongoing trend of de-dollarisation worldwide, with various countries actively seeking alternatives to the US currency. Russia's and China's efforts in this direction due to worsening relations with the US and sanctions, as well as the growing number of countries expressing a wish to join the BRICS, may serve as proof that such a trend may be gaining power.  

Although it remains uncertain whether the new BRICS currency would inspire the creation of additional US dollar alternatives, the possibility of challenging the dollar's status as a reserve currency persists. As countries continue diversifying their reserve holdings, the US dollar may encounter increasing competition from emerging currencies, potentially altering the global market's power dynamics.

Ultimately, the impact of a new BRICS currency on the US dollar may depend on its adoption rate, perceived stability, and the extent to which it can provide a credible alternative to the long-established dominance of the US dollar. 

Considering that Russia is among the wealthiest country in the world in terms of natural resources, including oil, natural gas, and gold, from which part is being exported. China being the second largest importer and the largest exporter country in the world, it may be realistic to consider that at least a part of these countries' international trade would shift from the US dollar to the new BRICS currency. 

China is not only the holder of the largest reserves in the world but also the second largest non-US holder of US treasuries after Japan. Meanwhile, China has been reducing its holdings of US debt instruments gradually. The US treasuries held in China's reserves fell below the 1 trillion US dollar mark in April 2022 and dropped to 849 billion USD in February 2023, the lowest level since May 2010 when it held 843.7 billion USD.

Analysts argue that China's main reason for selling off US treasuries is the aggressive rate-hiking policy adopted by the Federal Reserve to fight inflation (when interest rates rise, the value of debt instruments drops). Nevertheless, such action shows the People's Bank of China's flexibility to act according to its monetary and asset allocation policies. In case a BRICS currency is established and it gains a reputation as a stable and trustworthy currency, China may diversify its reserves further by also including the new currency in its holdings. Similarly, if the new currency is backed by gold (which is currently the most popular assumption), all member states may be forced to increase their gold holdings to ensure the stability of the new currency. In either case, both scenarios would imply that China could continue to reduce its exposure to US Treasuries. 

 

Santa Zvaigzne-Sproge, CFA, Head of Investment Advice Department at Conotoxia Ltd. (Conotoxia investment service)

Materials, analysis, and opinions contained, referenced, or provided herein are intended solely for informational and educational purposes. The personal opinion of the author does not represent and should not be constructed as a statement, or investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.

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Santa Zvaigzne-Sproģe, CFA

Santa Zvaigzne-Sproģe, CFA

Head of Investment Advice Department

A certified financial analyst with a broad experience in financial markets obtained working as a broker and securities specialist in various financial institutions across the Baltics.

In addition to obtaining the prestigious CFA license from CFA Institute and Advanced Certificate from CySEC in 2022 as well as Investment Advisor’s license from Baltic Financial Advisor’s Association in 2019, Santa holds MBA from Swiss Business School in Switzerland and master’s degree in finance from BA School of Business and Finance in Latvia.


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71.98% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 71.98% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
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