Gold FuturesUpdated CAN BRICS Gold Standard Threat USD in Nearest Months?
Last month there were several claims, and rumors, that BRICS will back its united future currency by gold.
The return of gold as money has been heavily discussed by gold bugs for about the last 10 years. Below I provided their general thoughts:
The gold bugs nailed that China and Russia have significantly boosted their gold reserves.
The countries conduct independent geopolitical policy that contradicts the West.
Dollar days are over. The White House sanction policy which escalated last 2 years combined with permanent US debt growth and dollar depreciation make it impossible to use USD in global trade, global investments, etc. The world needs to return to gold, because the last 50 years after Nixon suspended USD convertibility to gold, have shown that fiat is the pyramid of growing debt and continuous inflation.
In other words, claims about the BRICS gold standard perfectly fit these gold bugs' dreams.
During the year there were proposals for BRICS membership, from Algeria, Saudi Arabia, the UAE, and many other developing countries from different regions.
It is hilarious for me, that the acronym BRICS was coined by the British economist Jim O'Neill from Goldman Sachs. Today countries that oppose the West or conduct independent from the West policy, use the English acronym BRICS to describe themselves. West created BRICS (not only the acronym, but investments, favorable trade laws, etc.), and BRICS opposes the West.
I see five internal pillars to establish gold-backed supranational currency. You need
Several years ago BRICS established the supranational bank New Development Bank (the NDB). Possibly, it may become the alliance central bank and the issuer of gold-backed currency. Its total equity in the 1Q of 2023 was equal to 11.17 billion USD. It is big enough for private institutions from emerging markets, but not enough if you pretend to alternate the American dollar. The bank applies USD as its reporting currency. It makes sense if you do not oppose the dollar hegemony. According to the bank investor fact sheet, the bank is a bond market participant with high credit ratings, that regularly issues bonds in USD (again, hated dollar) and currencies of the members (CNY, RUB, ZAR bond programmes).
The bank has adopted the Contingent Reserve Arrangement (CRA). It is a framework to provide liquidity during financial stress. To my knowledge, it wasn't used in February 2022- March 2023 when the Russian financial system and especially the ruble were under enormous pressure. Russia closed its markets and imposed currency control measures to cool off unfavorable trends. It highlights how uncoordinated and unhelpful BRICS is. One excuse may exist if other members offered Russia to use the CRA and it refused.
You can say, that the NDB can easily increase its 11.17 billion USD equity using the gold reserves of the union. Let's move to gold holdings.
The first pane, under the continuous gold futures price, shows BRICS gold reserves performance according to the World Gold Council (WGC). At the end of Q1 2023 the combined reserves exceed 5444 (5444.53) tonnes or 175.045 million oz. It is noticeably higher than all world gold demand, which was estimated by the WGC at 4742 tonnes in 2022.
London Gold fix was 1963 USD/oz on July 21. Applying the price, the gold reserves of BRICS surpass 343.6 billion USD.
The major share is provided by Russia and China. Russia held 2326 tonnes (42.72% of the BRICS reserves), and China possessed 2068 tonnes or 37.98% of reserves. It was followed by India with 794.6 tonnes or 14.5%. Brazil and South Africa held almost the same amount of yellow shinning metal: 129.6 tonnes (2.38%), and 125 tonnes (2.3%) respectively.
It is the first striking difference that members have an uneven metal distribution that can undermine the future of a possible united monetary union. However, not necessarily countries would invest all their gold to create the gold-backed currency.
Another drastic difference is in their GDP size. The merged GDP of the block was about 25.91 trillion USD in 2022. China had 17.8 trillion USD, significantly exceeding others or accounting for 68.7% of the alliance. While it held 37.98% of all group gold reserves.
The next was India with 3.3 trillion USD providing 12.74% to the union's GDP. Its GDP share is close to its gold reserves share of 14.5%.
The third was Russia with 8.6% GDP share or 2.24 trillion USD. [Important to note that Russian GDP dollar estimation was hampered by the overpriced ruble in 2022. It was caused by Western sanctions on Russian imports, while Russia was receiving plenty of dollars for its commodities. That finally ballooned the country's current account surplus to the historical highs being a magical pill of ruble strength.]. It is not the big GDP share, while the country's gold reserves proportion was 47.7%.
Russia was followed by Brazil with a GDP equal to 1.92 trillion USD contributing 7.4% to the merged GDP. Brazil's GDP stake exceeded its metal reserves.
The South African GDP was 0.4 billion USD providing 1.54% of GDP. The GDP share is slightly below the country's metal stake in BRICS.
The economic strength of members does not equal countries' gold reserves. Only India and South Africa had close estimations of share in GDP and gold inventory.
The inclusion of export data in analysis can't show all the depth of international trade between the members, but quantitative figures will uncover the trade patterns. Not sure that export data on the 4th pane has equal periodicity, but I have to apply that all 5 countries have the same monthly periodicity. The summarized monthly exports are about 393 billion USD. The figures have some seasonality, more volatile than annual GDP and quarterly gold funds data, but their volatility will not wreck the analysis and the general situation.
China is the leader with 72.5% in the group exports.
Russia is the second with 9.1%.
India is sat next to it with 8.39%.
Brazil is close too, with 7.63%.
As in the previous rankings, the last one is the South African Republic with a 2.3% export share in the related group.
There are discrepancies between export share, GDP, and gold funds among the block. Again the South Africa figures of exports close to its gold reserves and GDP contribution, while for others they do not match.
Among the total export figures, we should take into account with whom the countries trade and what they trade. The primary buyers of Chinese exports are the USA, Japan, South Korea, and the EU or the West which use USD and partly EUR in their international contracts. The main export partner of Russia, Brazil, and South Africa is China. But the main export partner of India is the USA.
Nothing is surprising here, the predominant goods in Brazilian, Russian, and South African exports are commodities. The main world factory of consumer and industrial goods is China which buys commodities and consumes commodities to make the final goods. India is in the middle, it exports some goods, like pharmaceutical products, but the majority of the exports are commodities or refined commodities (like petroleum).
Worth noting that has happened after the West imposed sanctions on Russia. Russia has decreased its dependency on the West and extraordinarily increased market share in non-West countries, like India, Turkey, and China. They say Russia supplies its commodities with heavy discounts.
What currency do Russia and its non-western partners use? According to Reuters' article published on May 4, 2023, between Russia and India most of the transactions happened in the American dollar, other parts were made in Indian rupees, the UAE dirham (AED). Because Russia couldn't spend rupees, the two countries suspended their rupees trade. Russia preferred CNY and part of transactions were routed via China.
It says a lot about BRICS partners and their bilateral trade, transactions, and payment currencies. Even sanctioned Russia was ready to receive the dollar (thanks to a few exemptions provided for USD payments to Russian commodities), to receive AED, which is pegged to USD (quasi-dollar) and Chinese yuan. China is the main importer of Russia, so it is comfortable for Russia to receive yuan for its exported commodities and spend it on its imports. Why single supranational currency can be created after all the mentioned facts?
According to the Bank of Russia statistics, the yuan share in Russian exports payment was about 25% in May 2023, compared with the combined USD and EUR share of about 33%. About 30% of Russian imports were paid in Chinese yuan compared with 33%-34% of payments in USD and EUR.
Even being under sanctions and having the necessity to go away from the USD and EUR, Russia still significantly uses them. Having 2326 tonnes of gold and being #1 in the gold reserves ranking, Russia hasn't used it in its international trade. There are no official statistics that can prove using gold in Russian international trade. Why not use gold? Do the Western sanctions on Russian gold transactions undermine the Russian ability to use its gold in foreign trade? If the answer is yes, then for me it is hard to believe that not only gold-backed currency can be established, but also play an important role in the international trade between members of BRICS. It can be the BICS gold standard. Yuan-gold back standard, anything without Russia.
International trade is also about the trade of goods and services and international investments. The topics are out of the scope of my analysis. Of note, the majority of international reserves of these countries are invested in USD-denominated assets, predominantly bonds. I believe the most diverse is Russia which has invested its reserves in CNY, AUD, CAD, CHF, and GBP. All Russian reserves, except CNY-denominated, are under sanctions now. Will gold-backed BRICS currency have the assets nominated in the gold-backed units allowing economic agents to earn interest? At the minimum, it should provide opportunities to store value, be volatile as the American dollar or less, and be liquid to be exchanged in fiat and goods.
Finalizing 1,2,3,4, I want to add, that only current members were analyzed. If new members join, it will change amounts, countries share and their positions in gold funds, GDP, and international trade, and likely will demand to increase the NDB equity letting new members in.
I can imagine that the countries can adopt supranational and national legislation to establish gold-backed currency. But I can't imagine how many problems it will create. How it will work with their national currencies? How it will affect taxation? If it is backed by gold, then its currency rate will mimic the gold price. Can they issue debt in the new gold-backed currency? It will be like a creation of the European Union and its Eurozone with its fiat Euro. It can't work without a lot of frameworks and treaties. As Europe shows, treaties are not followed by its member states. If BRICS doesn't have aims to use their unborn currency in trade between private companies, and individuals, it will be like the SDR of the IMF. If exporter/importer (no matter, whether an individual or a company) can't use the currency, it will not outshine dollar transactions. Just a new measure of calculation of debt and assets for its members.
The internal factors were analyzed. There is one important external one. To protect the new currency, and develop its popularity to substitute the dollar you need to build trust in the currency among others.
On the bottom of the superchart, corruption ranks show. The least corrupt has first place among all other countries. The ranking compares countries with each other. You can argue that it is biased data. Yes, it can be. But I believe, it shows the general scene. China the best member-state, ranks 65th, South Africa is on 72nd place, India on the 85th, Brazil on 94th and Russia takes 137th place.
With these figures, I doubt that the supposed currency can be confidently used by the private sector and will be trusted by the private sector and non-member states.
All in all, there are a lot of contradictions in the creation of gold-backed currency, the USD substitution. If a country wants to use gold right now in international trade, it can do it, if its counterparty agrees, and there is no need to create the supranational monetary surrogate that is backed by gold. The current situation shows that countries are more likely to continue using USD, a national currency in international trade than create a confident and useful gold-backed currency.
Creation of a single currency can take years, countries will need time to adopt their laws and monetary policy, and business habits to use this currency. It may be a smooth long-term process to create the gold-backed currency. Even the situation with Russia, when the country needs to stop using 'poisonous' USD, has shown their economic agents still pay and receive USD.
In my opinion, that it is more probable, they would create a yuan-backed CBDC, than the BRICS gold-backed single monetary unit that will threaten the dollar.
Favorable rumors and estimations from experts could buoy gold prices until the end of the BRICS summit (August 24, 2023).
On the technical side, gold seems weak to breakout the 2100 USD/oz resistance in the nearest month. Presumably, it would float between 1900 and 2100 USD/oz.
The return of gold as money has been heavily discussed by gold bugs for about the last 10 years. Below I provided their general thoughts:
The gold bugs nailed that China and Russia have significantly boosted their gold reserves.
The countries conduct independent geopolitical policy that contradicts the West.
Dollar days are over. The White House sanction policy which escalated last 2 years combined with permanent US debt growth and dollar depreciation make it impossible to use USD in global trade, global investments, etc. The world needs to return to gold, because the last 50 years after Nixon suspended USD convertibility to gold, have shown that fiat is the pyramid of growing debt and continuous inflation.
In other words, claims about the BRICS gold standard perfectly fit these gold bugs' dreams.
During the year there were proposals for BRICS membership, from Algeria, Saudi Arabia, the UAE, and many other developing countries from different regions.
It is hilarious for me, that the acronym BRICS was coined by the British economist Jim O'Neill from Goldman Sachs. Today countries that oppose the West or conduct independent from the West policy, use the English acronym BRICS to describe themselves. West created BRICS (not only the acronym, but investments, favorable trade laws, etc.), and BRICS opposes the West.
I see five internal pillars to establish gold-backed supranational currency. You need
- a united bank that will manage the currency
- gold reserves,i.e. the funds for the currency
economic strength, that usually measured by GDP to compete with fiat and unfriendly regulations from non-block countries
established robust relations in international trade between members or potential members
supranational and national legislation that will regulate the currency without undermining national currencies, FX markets, monetary policy, etc.
Several years ago BRICS established the supranational bank New Development Bank (the NDB). Possibly, it may become the alliance central bank and the issuer of gold-backed currency. Its total equity in the 1Q of 2023 was equal to 11.17 billion USD. It is big enough for private institutions from emerging markets, but not enough if you pretend to alternate the American dollar. The bank applies USD as its reporting currency. It makes sense if you do not oppose the dollar hegemony. According to the bank investor fact sheet, the bank is a bond market participant with high credit ratings, that regularly issues bonds in USD (again, hated dollar) and currencies of the members (CNY, RUB, ZAR bond programmes).
The bank has adopted the Contingent Reserve Arrangement (CRA). It is a framework to provide liquidity during financial stress. To my knowledge, it wasn't used in February 2022- March 2023 when the Russian financial system and especially the ruble were under enormous pressure. Russia closed its markets and imposed currency control measures to cool off unfavorable trends. It highlights how uncoordinated and unhelpful BRICS is. One excuse may exist if other members offered Russia to use the CRA and it refused.
You can say, that the NDB can easily increase its 11.17 billion USD equity using the gold reserves of the union. Let's move to gold holdings.
The first pane, under the continuous gold futures price, shows BRICS gold reserves performance according to the World Gold Council (WGC). At the end of Q1 2023 the combined reserves exceed 5444 (5444.53) tonnes or 175.045 million oz. It is noticeably higher than all world gold demand, which was estimated by the WGC at 4742 tonnes in 2022.
London Gold fix was 1963 USD/oz on July 21. Applying the price, the gold reserves of BRICS surpass 343.6 billion USD.
The major share is provided by Russia and China. Russia held 2326 tonnes (42.72% of the BRICS reserves), and China possessed 2068 tonnes or 37.98% of reserves. It was followed by India with 794.6 tonnes or 14.5%. Brazil and South Africa held almost the same amount of yellow shinning metal: 129.6 tonnes (2.38%), and 125 tonnes (2.3%) respectively.
It is the first striking difference that members have an uneven metal distribution that can undermine the future of a possible united monetary union. However, not necessarily countries would invest all their gold to create the gold-backed currency.
Another drastic difference is in their GDP size. The merged GDP of the block was about 25.91 trillion USD in 2022. China had 17.8 trillion USD, significantly exceeding others or accounting for 68.7% of the alliance. While it held 37.98% of all group gold reserves.
The next was India with 3.3 trillion USD providing 12.74% to the union's GDP. Its GDP share is close to its gold reserves share of 14.5%.
The third was Russia with 8.6% GDP share or 2.24 trillion USD. [Important to note that Russian GDP dollar estimation was hampered by the overpriced ruble in 2022. It was caused by Western sanctions on Russian imports, while Russia was receiving plenty of dollars for its commodities. That finally ballooned the country's current account surplus to the historical highs being a magical pill of ruble strength.]. It is not the big GDP share, while the country's gold reserves proportion was 47.7%.
Russia was followed by Brazil with a GDP equal to 1.92 trillion USD contributing 7.4% to the merged GDP. Brazil's GDP stake exceeded its metal reserves.
The South African GDP was 0.4 billion USD providing 1.54% of GDP. The GDP share is slightly below the country's metal stake in BRICS.
The economic strength of members does not equal countries' gold reserves. Only India and South Africa had close estimations of share in GDP and gold inventory.
The inclusion of export data in analysis can't show all the depth of international trade between the members, but quantitative figures will uncover the trade patterns. Not sure that export data on the 4th pane has equal periodicity, but I have to apply that all 5 countries have the same monthly periodicity. The summarized monthly exports are about 393 billion USD. The figures have some seasonality, more volatile than annual GDP and quarterly gold funds data, but their volatility will not wreck the analysis and the general situation.
China is the leader with 72.5% in the group exports.
Russia is the second with 9.1%.
India is sat next to it with 8.39%.
Brazil is close too, with 7.63%.
As in the previous rankings, the last one is the South African Republic with a 2.3% export share in the related group.
There are discrepancies between export share, GDP, and gold funds among the block. Again the South Africa figures of exports close to its gold reserves and GDP contribution, while for others they do not match.
Among the total export figures, we should take into account with whom the countries trade and what they trade. The primary buyers of Chinese exports are the USA, Japan, South Korea, and the EU or the West which use USD and partly EUR in their international contracts. The main export partner of Russia, Brazil, and South Africa is China. But the main export partner of India is the USA.
Nothing is surprising here, the predominant goods in Brazilian, Russian, and South African exports are commodities. The main world factory of consumer and industrial goods is China which buys commodities and consumes commodities to make the final goods. India is in the middle, it exports some goods, like pharmaceutical products, but the majority of the exports are commodities or refined commodities (like petroleum).
Worth noting that has happened after the West imposed sanctions on Russia. Russia has decreased its dependency on the West and extraordinarily increased market share in non-West countries, like India, Turkey, and China. They say Russia supplies its commodities with heavy discounts.
What currency do Russia and its non-western partners use? According to Reuters' article published on May 4, 2023, between Russia and India most of the transactions happened in the American dollar, other parts were made in Indian rupees, the UAE dirham (AED). Because Russia couldn't spend rupees, the two countries suspended their rupees trade. Russia preferred CNY and part of transactions were routed via China.
It says a lot about BRICS partners and their bilateral trade, transactions, and payment currencies. Even sanctioned Russia was ready to receive the dollar (thanks to a few exemptions provided for USD payments to Russian commodities), to receive AED, which is pegged to USD (quasi-dollar) and Chinese yuan. China is the main importer of Russia, so it is comfortable for Russia to receive yuan for its exported commodities and spend it on its imports. Why single supranational currency can be created after all the mentioned facts?
According to the Bank of Russia statistics, the yuan share in Russian exports payment was about 25% in May 2023, compared with the combined USD and EUR share of about 33%. About 30% of Russian imports were paid in Chinese yuan compared with 33%-34% of payments in USD and EUR.
Even being under sanctions and having the necessity to go away from the USD and EUR, Russia still significantly uses them. Having 2326 tonnes of gold and being #1 in the gold reserves ranking, Russia hasn't used it in its international trade. There are no official statistics that can prove using gold in Russian international trade. Why not use gold? Do the Western sanctions on Russian gold transactions undermine the Russian ability to use its gold in foreign trade? If the answer is yes, then for me it is hard to believe that not only gold-backed currency can be established, but also play an important role in the international trade between members of BRICS. It can be the BICS gold standard. Yuan-gold back standard, anything without Russia.
International trade is also about the trade of goods and services and international investments. The topics are out of the scope of my analysis. Of note, the majority of international reserves of these countries are invested in USD-denominated assets, predominantly bonds. I believe the most diverse is Russia which has invested its reserves in CNY, AUD, CAD, CHF, and GBP. All Russian reserves, except CNY-denominated, are under sanctions now. Will gold-backed BRICS currency have the assets nominated in the gold-backed units allowing economic agents to earn interest? At the minimum, it should provide opportunities to store value, be volatile as the American dollar or less, and be liquid to be exchanged in fiat and goods.
Finalizing 1,2,3,4, I want to add, that only current members were analyzed. If new members join, it will change amounts, countries share and their positions in gold funds, GDP, and international trade, and likely will demand to increase the NDB equity letting new members in.
I can imagine that the countries can adopt supranational and national legislation to establish gold-backed currency. But I can't imagine how many problems it will create. How it will work with their national currencies? How it will affect taxation? If it is backed by gold, then its currency rate will mimic the gold price. Can they issue debt in the new gold-backed currency? It will be like a creation of the European Union and its Eurozone with its fiat Euro. It can't work without a lot of frameworks and treaties. As Europe shows, treaties are not followed by its member states. If BRICS doesn't have aims to use their unborn currency in trade between private companies, and individuals, it will be like the SDR of the IMF. If exporter/importer (no matter, whether an individual or a company) can't use the currency, it will not outshine dollar transactions. Just a new measure of calculation of debt and assets for its members.
The internal factors were analyzed. There is one important external one. To protect the new currency, and develop its popularity to substitute the dollar you need to build trust in the currency among others.
On the bottom of the superchart, corruption ranks show. The least corrupt has first place among all other countries. The ranking compares countries with each other. You can argue that it is biased data. Yes, it can be. But I believe, it shows the general scene. China the best member-state, ranks 65th, South Africa is on 72nd place, India on the 85th, Brazil on 94th and Russia takes 137th place.
With these figures, I doubt that the supposed currency can be confidently used by the private sector and will be trusted by the private sector and non-member states.
All in all, there are a lot of contradictions in the creation of gold-backed currency, the USD substitution. If a country wants to use gold right now in international trade, it can do it, if its counterparty agrees, and there is no need to create the supranational monetary surrogate that is backed by gold. The current situation shows that countries are more likely to continue using USD, a national currency in international trade than create a confident and useful gold-backed currency.
Creation of a single currency can take years, countries will need time to adopt their laws and monetary policy, and business habits to use this currency. It may be a smooth long-term process to create the gold-backed currency. Even the situation with Russia, when the country needs to stop using 'poisonous' USD, has shown their economic agents still pay and receive USD.
In my opinion, that it is more probable, they would create a yuan-backed CBDC, than the BRICS gold-backed single monetary unit that will threaten the dollar.
Favorable rumors and estimations from experts could buoy gold prices until the end of the BRICS summit (August 24, 2023).
On the technical side, gold seems weak to breakout the 2100 USD/oz resistance in the nearest month. Presumably, it would float between 1900 and 2100 USD/oz.
Note
It is time to correct my visualization mistakes made in the initial post.BRICS Gold Reserves
BRICS GDP
BRICS Exports
BRICS Corruption Rank
Note
While we are waiting for next week's BRICS Summit and the allegedly BRICS gold standard that their members allegedly may announce, this week gold prices were sceptical about it. The gold prices dropped to its support zone of $1900-1915. If the price breaks out of the zone (I expect it could happen during next week), the next stop would be the February-March 2023 level of $1815. If not, the range between 1900 and 2000, designated in the initial post, still be valid. Note
As I expected, nothing related to gold-backed currency was declared at the BRICS Summit. It was fake news or a propaganda attempt to persuade of the imminent dollar death. This week Bloomberg reported SWIFT payment statistics. 46% of foreign payments were done in USD, followed by euro, pound, yen, and yuan with 3% of payments.
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