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(Kitco News) -
Despite denials from the host country, some market analysts believe that a gold-backed BRICS currency announcement may still be forthcoming at the August summit in Johannesburg, South Africa.
According to a recent research report from London-based CrossBorder Capital, “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.” They characterize this as the “most important development in international finance since the 1971 Nixon Shock” when the United States abandoned the gold standard.
The analysts write that a gold-backed BRICS currency would be “a potential disruptor,” and would highlight “the growing importance of collateral backing in global credit markets,” which they believe is an attempt to “move the World monetary system back from (largely US) fiscal collateral to its origins in gold bullion collateral.”
CrossBorder Capital sees in the BRICS currency as a potential powerpay by China, which has made clear its goal of rivaling U.S. dominance in international finance. “Hiding the Chinese Yuan within a new BRICS unit may be a clever way of reaching her goal a tad faster?” they write. “Wolf economic diplomacy in sheep’s clothing, perhaps?”
Rising gold reserves
And the bloc may soon have the gold to back their purported ambitions. The analysts claim that the gold reserves of existing BRICS members Brazil, Russia, India, China and South Africa, combined with those of the 40-plus nations that have expressed an interest in joining the bloc, may surpass U.S. reserves by the end of the year, if they haven’t already.
Even with superior reserves, however, the analysts expect that the impact of a gold-backed BRICS currency would be more political than economic.
“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,” they write. “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.”
But they warn that “the potential economic damage to US interests from a gold-backed BRICS unit must not be entirely dismissed,” saying that it would likely raise the price for U.S. Treasuries. “It should also help to support the price of gold as the BRICS club expands,” they added.
U.S. dollar’s foundation remains strong
Still, the analysts do not believe that the announcement or even the adoption of a BRICS alternative to the greenback would alter the fundamental value calculus of international trade and global finance. “The alternative of simply redenominating international trade in Russian Roubles, Chinese Yuan, or the new BRICS unit counts for little,” they wrote. “It is akin to measuring the length of Park Avenue in kilometres rather than miles and somehow claiming it is now longer! It is the choice of currency used for transactions and settlement that really matters.”
They also claim that a focus on “the denomination of trade flows rather than the source and destination of capital flows” exaggerates the threat of a BRICS currency. “Put another way, even with commodity-backing for a currency whose banks are going to lend against this collateral? We must, therefore, think of the international monetary system more correctly as a US dollar-based global funding system, with the US acting de facto as ‘banker to the World,’” they said. “The World needs somewhere acceptable to place its surplus capital, while the flip side requires an asset market that is willing to absorb these inflows. Think US dollar. Think Wall Street.”
Theoretically, they said, foreigners can choose where to invest their savings. “But, in practice, the whopping financial surpluses racked up by the BRICS economies must be invested somewhere outside of their own markets and American assets are virtually the only sizeable choice.”
“Simply changing the currency denomination of trade flows away from the US dollar, say into Yuan or even Roubles, and imposing sanctions against certain nations, namely Russia and Iran, will chip away at US dollar usage, but they will not displace the US dollar unless they challenge this funding system. Put another way, the dominance of the US dollar parallels the dominance of the US financial system,” they wrote. “Thus, the end of the US dollar as international money first requires the demise of US finance.”
And that would require far more than merely displacing the dollar as the dominant currency, itself no small feat. Because the dollar-based financing system is built on the stability of the U.S. Treasury market and backed by the U.S. military, “Challenging the US dollar system requires these twin pillars to fall.”
BRICS could corner gold
The analysts point out that some believe a strong currency would benefit BRICS economies. “This is clearer for the pure commodity producers, such as Brazil, Russia and South Africa, than for, say, China and India,” they said. “It is true that, as a major domestic bullion holder, India could gain from a higher gold price, while China’s geopolitical ambitions likely demand a strong currency. Consequently, some fear that the BRICS club could effectively corner the free market in gold bullion, by pricing and exchanging their commodities in the gold-backed unit. This would increase gold demand and create a scarcity in World markets, sufficient to trigger a price spike. The other side of this trade is a substantially weaker US dollar.
But the analysts note that this would have the byproduct of making many emerging economies less competitive, including that of China. “The Yuan, for example, already looks to us some 20% overvalued in real terms following the technology trade embargo imposed by the US,” they wrote. “Hence, further implied real strength in the Yuan could impose a major deflationary hit to the Chinese economy. It seems an unlikely political tactic.”
The analysts believe that despite all the international headwinds provided by its rivals, the only country that can knock the United States out of its preeminent position in global finance is the United States. “[T]he biggest risk to the US dollar comes from the US itself, because of a lack of fiscal discipline, and not from the Chinese Yuan, the Russian Rouble or the proposed BRICS unit,” they said. “None of these possible rivals can fulfill a future funding role without an equivalent network of international banks, without sourcing a ‘safe asset’ and given existing capital controls in China and elsewhere.”
“These Capital Wars will prove bruising,” they said. “Russia has recently adopted discriminatory tactics, similar to those used by the US, for her energy payments, while China herself has history of sanctioning countries that speak-out against her, such as Australia. Exactly which camp, friend or foe, each national economy now chooses matters a lot.”
“Clipping the wings of the US dollar funding system is very different from successfully building a rival,” they concluded. “Expect a whimper in August, not a bang.”
The 15th BRICS summit will take place from Aug. 22-24 in Johannesburg, South Africa.
