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Countries are using gold to rebel against the U.S. dollar as BRICS' influence grows

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(Kitco News) While many analysts maintain that the U.S. dollar's demise trend is exaggerated, Rockefeller International chairman Ruchir Sharma warned that many countries are accelerating the search for an alternative reserve currency. And gold is at the center of the conversation.

"The oldest and most traditional of assets, gold, is now a vehicle of central bank revolt against the dollar. Often in the past both the dollar and gold have been seen as havens, but now gold is seen as much safer," Sharma, who is also the founder and chief investment officer of Breakout Capital, said in a commentary published by FT over the weekend.

The main reason for the shift to gold has been the increased use of sanctions as a weapon by the U.S. and its allies, Sharma said.

"Gold [is] up 20 per cent in six months. Surging demand is not led by the usual suspects — investors large and small, seeking a hedge against inflation and low real interest rates. Instead, the heavy buyers are central banks, which are sharply reducing their dollar holdings and seeking a safe alternative," he noted.

Indeed, central banks bought a record amount of gold in 2022. And this year kicked off on a solid note as well, with the trend unlikely to slow down any time soon, according to the World Gold Council.

"This buying boom has helped push the price of gold to near-record levels and more than 50 per cent higher than what models based on real interest rates would suggest. Clearly, something new is driving gold prices," Sharma described.

The biggest gold buyers have been emerging economies such as China, Russia, India, and Turkey. Most of these countries are also interested in creating their own currency to bypass the U.S. dollar when trading or boosting their reserves.

This issue has come to the forefront after the West introduced a barrage of sanctions against Russia following Moscow's invasion of Ukraine.

"The US saw sanctions as a cost-free way to fight Russia without risking troops. But it is paying the price in lost currency allegiances," Sharma wrote. "Astonishingly, 30 per cent of all countries now face sanctions from the US, the EU, Japan and the UK — up from 10 per cent in the early 90s," Sharma noted.

The search for the right central bank digital currencies (CBDCs) has also intensified, with the number of countries looking into the idea tripling in the last three years, marking another potential challenge to the U.S. dollar, he added.

Sharma warned that the big risk to the U.S. is "overconfidence" in the idea that there is no good alternative to the U.S. dollar as the world's reserve currency.

"The last line of defence for the dollar is the state of China … When a giant comes to rely on the weakness of rivals, it's time to look hard in the mirror. When it faces challenges from a 'barbaric relic' such as gold and new contenders like digital currency, it should be looking for ways to strengthen trust in its finances, not taking its financial superpower status for granted," he said.

In the meantime, BRICS' sphere of influence is only likely to grow. The group is the emerging-markets bloc made up of Brazil, Russia, India, China, and South Africa.

And there are now 19 countries that would like to join the group, which received new membership requests ahead of its annual summit that will be held in South Africa on June 2-3.

The idea of expansion will be raised during the annual meeting, Bloomberg quoted Anil Sooklal, South Africa's ambassador to the group, as saying on Monday. "What will be discussed is the expansion of BRICS and the modalities of how this will happen," Sooklal stated. "Thirteen countries have formally asked to join and another six have asked informally. We are getting applications to join every day."

The topic of expanding the membership was raised by China last year. And since the creation of the group in 2006, only one additional member has been added - South Africa. And that was over a decade ago.

Some of the countries looking to join the ranks are Saudi Arabia, Iran, Argentina, the United Arab Emirates, Algeria, Egypt, Bahrain, and Indonesia.

The influence of BRICS has become a popular topic among analysts amid the growing de-dollarization trend. Last month, former Goldman Sachs chief economist Jim O'Neill called on the BRICS bloc to expand and challenge the dominance of the U.S. dollar.

O'Neill said that the dollar's dominance destabilizes other nations' monetary policies, which is why the bloc should work to counter it.

"The U.S. dollar plays a far too dominant role in global finance," he wrote in a paper published in the Global Policy journal. "Whenever the Federal Reserve Board has embarked on periods of monetary tightening, or the opposite, loosening, the consequences on the value of the dollar and the knock-on effects have been dramatic."

To read more about the recent de-dollarization developments across the globe, click here.

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