The BRICS+ Are Going For Gold
Gold, the precious metal used in everyday society for Cartier jewelry and Olympic medals, has a storied history of being a safe haven asset traced back to the Ancient Egyptians when they excavated the first documented tunnels to access gold mines in the Eastern Desert (Schorsch 2017). Gold’s rarity and durability made it ideal for minting coins used in trade and commerce, ultimately becoming a universal measure of value. During times of geopolitical uncertainty, inflationary pressures, and stock market volatility, gold has always been highly sought after, and lately, has been in even greater demand by some of the world’s most influential global economies looking to create an alternative to the global hegemony of the US dollar.
In July 1944, at the end of World War II, 44 allied delegates, led by the United States and the United Kingdom, established the Bretton Woods system intending to create a stable and cohesive international economic system to promote international monetary cooperation, stimulate economic growth, and prevent competitive devaluations and trade barriers that plagued the global economy during the interwar period (Hetzel 2013). The system established the International Money Fund (IMF) and the International Bank for Reconstruction and Development (now the World Bank) and was modeled after the gold standard, with member countries pegging their currencies to the US dollar while the United States established a fixed exchange rate between the dollar and gold at $35 per ounce (ProCon 2023). The Bretton Woods agreement solidified the dollar as the world’s global reserve currency in the international monetary system and established institutional hegemony in the global trade sphere. As time passed, however, the Federal Reserve continued to print dollars to fund expenditures on the Vietnam War and social programs. As a result, there were four times as many dollars in circulation as there were gold in reserves (Garten 2021). In fear of countries demanding gold for their US dollar reserves and possibly bankrupting the United States, Richard Nixon effectively ended the Bretton Woods system, by suspending the convertibility of the US dollar into gold and floating the US exchange rate. On August 15th, 1971, the US dollar became a fiat currency (ProCon 2023). Unlike the gold standard, where gold’s intrinsic value is primarily determined by supply and demand, a fiat currency’s value is backed by the public’s faith in the government or central bank that issued it and its capability to be exchanged for its value in goods and services.
The Bretton Woods System proved to have a broader structural problem, also known as the Triffin Dilemma. This problem occurs when a country, such as the United States, issues a global reserve currency because of its global importance as a medium of exchange. However, the currency's stability comes into question when the country is persistently running current account deficits to fulfill that supply, and as the current account deficits accumulate, the reserve currency becomes less desirable and its position as a reserve currency is threatened (Ghizoni 2013). In the case of the Nixon presidency, the circulation of US dollars greatly outweighed the gold reserves held by the Federal Reserve. In the present day, while the US dollar remains the global reserve currency, the U.S. government runs a balance of payments deficit to supply liquidity to all those who demand it, fueling global liquidity and growth at the expense of rising debt in its own domestic economy while eroding confidence in the dollar’s reserve status. As global skepticism grew, central banks reduced their U.S. dollar reserves to 59% in 2020–a 25-year low–while the United States government debt has grown by nearly 5,600% since the end of the gold standard, more than double the US economic growth rate (Arslanalp and Simpson-Bell 2021; Llosa 2024). In turn, foreign demand for US dollars has diminished in favor of safe-haven assets such as gold, and a majority of this structural shift in demand originates from the BRICS+ nations, a group of emerging market economies seeking to challenge the dominance of the US dollar in global transactions.
Founded in 2009, the BRICS nations, an acronym for Brazil, Russia, India, China, and South Africa, are a geopolitical coalition aiming to challenge the West's political and economic power. In January 2024, Egypt, Ethiopia, Iran, Saudi Arabia, and the United Arab Emirates (UAE) became members, making it officially known as BRICS+. As it stands, the bloc represents about 45% of the world population, 28% of the global economy, and produces about 44% of the world’s crude oil, positioning them with significant leverage on the world stage (BBC 2024). While the BRICS+ may be a formidable force in the global economy, the US dollar dominates with the help of Western central powers in the current international monetary system. After the start of the Russo-Ukrainian War, the West expelled Russia from the SWIFT global banking communications system. SWIFT is a European cross-border transaction system that enables banks to efficiently transfer funds between countries. After Russia was banned from the SWIFT system, Russian energy exports could no longer be settled in US dollars or Euros (Bai 2023). The weaponization of the global ‘safe haven currency’ by the West caused Russia and other developing countries to have a sense of distrust within the Western financial system. US-China relations have intensified in recent years, and with China boasting the world’s largest exporting economy, China wants to be prepared for looming US economic sanctions. Similar to Russia and China, the rest of the BRICS+ nations have started to question dollar-denominated assets and the geopolitical risk and uncertainty they pose. Conveniently, these countries have currently been some of the largest purchasers of gold in the world.
Over the past three years, the largest BRICS+ members–Brazil, Egypt, India, Russia, and China–have amassed record-high central bank gold reserves (Barchart 2024). According to the Nasdaq, “As of Q2 2024, the combined central bank gold holdings of the original BRICS nations plus Egypt (the only nation of the five new additions to have central bank gold reserves) accounted for more than 20 percent of all the gold held in the world's central banks. Russia, India, and China rank in the top 10 for central bank gold holdings” (Pistilli 2024). The price of gold hit an all-time high of $2,787.04 per ounce in October of 2024, an increase of about 32.54% this year alone (USA Gold 2024). The current global demand for gold and the timing of the buying spree by the BRICS+ is not a coincidence. The Western powers leveraging sanctions, tariffs, and outright banning the use of the US dollar have caused these emerging market nations to seek refuge in the neutrality and safety of gold. Gold offers preservation of purchasing power, so these nations have increased their reserves to better serve their own economic interests while reducing their global dependence on the US dollar.
At the 16th annual BRICS+ Summit in Kazan, Russia this year, Vladimir Putin called for an alternative international payment system that could prevent the US from using the dollar as a political weapon. Putin made it clear that he is not against the use of the US dollar, but rather takes issue with the weaponization of the dollar by the Western powers, as he said, “We are not refusing, not fighting the dollar, but if they don't let us work with it, what can we do: we then have to look for other alternatives, which is happening” (Tan 2024). However, the summit indicated that little progress has been made on the full integration of an alternative payment system and that it is rather a medium to long-term ambition. In the meantime, Russia has spearheaded the plan on the potential new alternative cross-border transaction system referred to as the “UNIT” that aims to create an alternative to the US dollar-dominated SWIFT payment system. Since 2022, the BRICS+ have already been using mBridge, a multi-central bank digital currency platform, that has allowed them to trade amongst each other in their respective sovereign currencies as an alternative to the SWIFT system (Wilkerson 2024). At the summit, Putin said that “nearly 95% of trade between Russia and China is now conducted in rubles and yuan” (Wintour 2024). The introduction of the UNIT would take the mBridge system to new heights by creating a common store of value, medium of exchange, and unit of account not dependent on a single currency. The UNIT would be a fully collateralized digital token run on a blockchain, backed by 40% gold and 60% currencies from the participating countries in BRICS+. The value of the UNIT would be linked to the underlying collateral, and not one single currency would ever represent more than 30% of the collateral basket. It is not intended to replace the sovereign currencies or become legal tender among the BRICS+ nations, but rather to create a seamless transaction system for global trade and capital flows among these developing markets (Subbotin and Luo 2023). By leveraging this technology against the Western payment system and central banks, this new cross-border transaction system can help achieve the BRICS+ goal of reducing their dependence on the US dollar in the global markets and create a system that better serves the interests of their own economies.
Although the BRICS+ coalition is often seen as a challenge to Western hegemony, its member nations face internal divisions on their shared goal. The differing political and economic agendas between nations within the bloc will cause them to face significant challenges in forming an optimal currency area. An optimal currency area is a geographic area in which a single currency would create the greatest economic benefit, and the criteria for this area were first outlined by economist Robert Mundell in 1961. The four main criteria for an OCA are the following: the degree of labor mobility, the level of goods market integration, the extent of fiscal integration, and the similarity of monetary policy shocks (Investopedia 2024). The criteria are all essential for a successful currency union, and the BRICS+ coalition fails to meet them. While the BRICS+ is not looking to create their own common currency, for them to successfully integrate economically, they must deal with the economic diversity amongst each other to reach their goal of shared economic and geopolitical cooperation. The idea of having a shared mission amongst the BRICS+ nations has begun to become more difficult as member countries such as Brazil and India are trying to prevent the bloc from becoming an anti-western alliance which would ultimately hinder their trade relations in the global economy and create significant welfare implications. Suppose the United States decides to impose tariffs or other trade barriers on member countries of the BRICS+, or the coalition as a whole. In that case, they will be dealt with devastating economic effects. Higher import costs or reduced export markets could lead to an increase in inflation, and a reduction in consumer purchasing power, while negatively impacting economic growth and revenues. While challenging the dominance of the US dollar and the Western powers may seem like the right move in the long run, in the short term, the US dollar is entrenched in the global currency landscape in both trade transactions and foreign exchange reserves as more than 80% of international trade transactions are invoiced in US dollars, which also accounts for nearly 60% of central banks reserves (Wintour 2024). The BRICS+ nations must realize the uphill battle they face, and that it will continue unless they pursue policies that enhance their long-term economic competitiveness.
References
Arslanalp, Serkan, and Chima Simpson-Bell. “US Dollar Share of Global Foreign Exchange Reserves Drops to 25-Year Low.” IMF, May 5, 2021. https://www.imf.org/en/Blogs/Articles/2021/05/05/blog-us-dollar-share-of-global-foreign-exchange-reserves-drops-to-25-year-low.
Bai, Gao. “From De-Risking to De-Dollarisation: The Brics Currency and the Future of the International Financial Order.” Tricontinental, May 17, 2024. https://thetricontinental.org/wenhua-zongheng-2024-1-derisking-dedollarisation-brics-currency/#_ftn10.
“BRICS: What Is the Group and Which Countries Have Joined?” BBC News, February 1, 2024. https://www.bbc.com/news/world-66525474.
“Brics Members Are Stacking up on Gold.” Barchart.com, October 13, 2024. https://x.com/barchart/status/1845596208796156166?s=42&t=cfwardj97PFvfEZQcG3SX.
Garten, Jeffrey E. “How the ‘Nixon Shock’ Remade the World Economy.” Yale Insights, July 13, 2021. https://insights.som.yale.edu/insights/how-the-nixon-shock-remade-the-world-economy.
Ghizoni, Sandra Kollen. “Nixon Ends Convertibility of U.S. Dollars to Gold and Announces Wage/Price Controls.” Federal Reserve History, November 22, 2013. https://www.federalreservehistory.org/essays/gold-convertibility-ends.
Hetzel, Robert L. “Launch of the Bretton Woods System.” Federal Reserve History, November 22, 2013. https://www.federalreservehistory.org/essays/bretton-woods-launched.
Kelly, Robert C., and Vikki Velasquez. “Optimal Currency Area (OCA) Definition & Criteria.” Investopedia, July 5, 2024. https://www.investopedia.com/terms/o/optimal-currency-area.asp.
Llosa, Alvaro Vargas. “The National Debt Is over $34 Trillion. It’s Time to Tell the Truth about the U.S. Government’s Finances.” Fortune, June 24, 2024. https://fortune.com/2024/06/24/national-debt-34-trillion-america-government-finances/.
Pistilli, Melissa. “How Would a New BRICS Currency Affect the US Dollar?” Nasdaq, December 2, 2024. https://www.nasdaq.com/articles/how-would-new-brics-currency-affect-us-dollar-updated-2024.
ProCon, The Editors of. “Gold Standard: Pros, Cons, Debate, Arguments, Currency, Inflation, & Dollars: Britannica.” Encyclopedia Britannica, November 11, 2024. https://gold-standard.procon.org/history-of-the-gold-standard/.
Schorsch, Deborah. “Gold in Ancient Egypt: Essay: The Metropolitan Museum of Art: Heilbrunn Timeline of Art History.” The Met’s Heilbrunn Timeline of Art History, January 2017. http://www.metmuseum.org/toah/hd/egold/hd_egold.htm#:~:text=Egypt%20is%20a%20land%20rich,items%20used%20for%20personal%20adornment.
Subbotin, Alexey, and Ji Luo. “The Unit White Paper.” UNIT white paper, May 9, 2023. https://wp.unitfoundation.org/.
Tan, Huileng. “Putin Has Spent Years Championing De-Dollarization - but a New Reality Is Setting In.” Business Insider, October 25, 2024. https://www.businessinsider.com/dedollarization-brics-russia-putin-us-dollar-payments-kazan-declaration-currency-2024-10.
Wintour, Patrick. “Putin Calls for Alternative International Payment System at BRICS SUMMIT.” The Guardian, October 23, 2024. https://www.theguardian.com/world/2024/oct/23/putin-world-economy-bloc-brics-summit.
Wilkerson, Michael. “Another BRICS in the Wall.” Stromwall, October 21, 2024. https://stormwall.com/another-brics-in-the-wall/.
“Gold Price History.” USA GOLD. Accessed December 8, 2024.https://www.usagold.com/daily-gold-price-history/.