BRICS and the Gold Race

The BRICS (Brazil, Russia, India, China, and South Africa) has expanded to include Egypt, Ethiopia, Iran, United Arab Emirates, and Saudi Arabia, doubling its size to ten member states. Thirty-four additional countries have expressed interest in joining. Russia currently chairs the organization, and its next summit will be held in Kazan from October 22 to 24, 2024.

In response to sanctions following the Ukraine invasion, Russia is spearheading efforts to establish alternative financial mechanisms within the BRICS, including blockchain infrastructure, interbank payment systems, and a gold-backed currency. Everett Millman, Chief Market Analyst at Gainesville Coins, emphasizes the importance of these developments for the precious metals market, particularly regarding Russia's chairmanship. He suggests that the primary target audience for BRICS narratives is unaligned countries, especially those in Africa, where economic growth potential remains untapped. Millman suggests that Africa could become a battleground between the West and BRICS, with Russia and China keen to expand their influence in the region.

Millman emphasizes Africa's importance for the mining investment community, suggesting that new gold exploration is necessary as existing mines reach the end of their lifespan. He sees Africa as an untapped market with potential for significant investment and new gold mines. With gold's stock-to-flow ratio remaining consistent, Millman believes Africa holds the key to maintaining gold production levels in the face of dwindling new discoveries.

Jameel Ahmad, Chief Analyst at GTC Global Trade Capital, remains bullish on the BRICS despite challenges like COVID and inflation. He sees exponential opportunities for the bloc in the evolving global political landscape. Ahmad acknowledges that the BRICS's potential to become a global economic powerhouse may be delayed due to current economic crises, but he believes it could happen sooner if advanced economies continue to underperform. However, Ahmad notes that the inclusion of emerging economies in the BRICS carries risks due to their volatility, despite their long-term potential.

One notable initiative within the BRICS is Russia's development of a new interbank transfer system, aimed at providing an alternative to SWIFT, the global standard for interbank transfers. Adam Button, Head of Currency Strategy at Forexlive.com, highlights the need for such alternatives, particularly for countries under threat of U.S. or European sanctions. He believes these new systems will succeed over time, potentially reinforcing the position of the U.S. dollar in international finance.

Everett Millman, Chief Market Analyst at Gainesville Coins, suggests that the new payment system could have positive implications for gold, as countries involved in developing alternative systems have significant gold reserves. However, he cautions that the development of such systems takes time, and the response from Western powers could influence the outcome.

While there may be limited downside risk to the dominance of the U.S. dollar from these alternative payment systems, Button believes any erosion of the dollar's dominance would be gradual and not a significant concern in the near future.

The idea of a shared currency within the BRICS has gained attention, especially after Russia's U.S. dollar assets were frozen in 2022. This currency could be a new common currency backed by gold or follow the model where the strongest member's currency becomes the de facto medium of exchange. However, Jameel Ahmad, Chief Analyst at GTC Global Trade Capital, believes that the BRICS is not ready to present a contending currency anytime soon due to the lack of institutional depth, diverse assets, and central bank support.

Adam Button, Head of Currency Strategy at Forexlive.com, highlights the challenges of rival currencies, emphasizing that currency reserves are held in debt, particularly in the form of U.S. Treasuries, which offer unparalleled liquidity. He suggests that even the sum total of non-U.S. international debt cannot compete with the liquidity of U.S. Treasuries. Button points out that the euro's rise and challenges illustrate the difficulties a BRICS currency would face, especially given the lack of common bonds and a supportive global environment.

Ahmad notes that while the euro has performed well, it remains a distant second to the U.S. dollar in terms of international reserves and FX transactions. He highlights issues with standardization of financial instruments and conflicts of interest within the European Union, suggesting that similar challenges could arise with a hypothetical BRICS monetary system.

Button emphasizes the entrenched position of the U.S. dollar in global finance, suggesting that displacing it would require significant upheaval, such as a major dislocation in the U.S. economy or worldwide conflict. Ahmad echoes this sentiment, highlighting the U.S. dollar's enduring dominance despite global challenges and crises. Ahmad notes that even during crises, investors flock to the U.S. dollar, underscoring its resilience and importance in the international financial system

As for the appeal of joining the BRICS, Button suggests that countries may seek an alternative trading bloc to mitigate U.S. coercion and control while still prioritizing liberal markets. However, he acknowledges that the BRICS, led primarily by China, may not offer a significantly better alternative, given China's own geopolitical ambitions.

The discussion also touches on China's strategic accumulation of gold, indicating its importance in China's long-term economic and geopolitical plans. Millman suggests that China's control over gold production and reserves could ultimately give it significant influence within the BRICS and the broader international financial landscape, potentially surpassing the U.S. in terms of leverage and control.