BRICS may not create a new gold standard, but the world still needs a monetary metal
Neils Christensen
Friday July 21, 2023 17:01
(Kitco News) – Two weeks ago, we saw a lot of excitement surrounding news from Russian sources that Brazil, Russia, India, China, and South Africa were going to announce the creation of a gold-backed BRICS trading currency.
However, the celebrations might have been premature after Anil Sooklal, South Africa’s ambassador to BRICS, said no such announcement was being planned. Okay, the world will not see the creation of a new global gold standard, but the summit next month will still have significant implications for the precious metal.
The outright dismissal of a gold-backed trading currency doesn’t come as a surprise, as many economists have noted that a new gold standard has never been realistic as it would create too much economic instability through deflation.
However, many analysts and economists expect that gold will still play an essential role as a monetary metal. In the press briefing, Sooklal noted that more than 40 countries have indicated an interest in joining the bloc of major developing economies.
This is a much more significant threat to the U.S. dollar’s status as the world’s reserve currency than a hypothetical discussion regarding a gold standard. Probably not all 40 nations will be accepted into the BRICS union, but it could still be significant enough that countries will be able to trade with each other without having to use the U.S. dollar.
Sooklal himself even noted the potential demise of the U.S. dollar. “The days of a dollar-centric world is over; that’s a reality. We have a multipolar global trading system today,” he said during a press briefing.
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Of course, what nobody is talking about as they look at expanding this trading bloc is capital preservation. The U.S. dollar as the reserve currency has been the anchor in global financial markets. If the U.S. dollar is not going to fill that role, what will?
Are nations really going to accept the yuan, with all of China’s capital controls, as the foundation for trade? Is there any other currency that other nations would trust?
It all comes back to gold. The precious metal has no counterparty risks, it is not beholden to any one government or entity, and it is a reliable safe-haven asset. If the world is genuinely starting to witness the demise of the U.S. dollar, countries will have to hold more gold in their reserves to give their currencies value and stability.
The global economy is probably long past a gold standard, but the need for safe collateral that third-party nations can trust will always be there.
Investors should consider these long-term bullish fundamentals when the Federal Reserve meets next week. Markets see a more than 90% chance that the central bank will raise interest rates by 25 basis points. With core inflation still sticky, there are growing expectations that the Federal Reserve will have to maintain a hawkish bias, even if this meeting could be the last rate hike in this tightening cycle.
The U.S. dollar has been pretty beaten up lately, so a short-squeeze rally following a hawkish Fed would not be a major surprise, according to some market analysts. This will weigh on gold in the near term.
However, we expect that with the precious metal’s healthy bullish fundamentals, any major dip in gold is expected to be bought. Buckle up, because we could see a wild ride next week.
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Have a great weekend.
Source: Kitco News
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