How could a BRICS gold currency impact the global economy?

BRICS countries and other nations are looking to reduce their dependence on the US Dollar, and other major currencies such as the euro and yen. The BRICS nations have been exploring the idea of a precious metal-backed currency for a long time. 

Despite Russia showing less urgency on the project in the recent BRICS summit, this block of countries is still supporting the de-dollarisation process. But what would it mean for the global economic system? Let us analyse this topic in detail and explore how it could change the global financial landscape.

Key Takeaways

• BRICS countries have been increasing their gold reserves
• Countries are exploring the idea of a new gold-backed currency
• Success in the initiative could change the financial landscape significantly
• Gold-backed currency could boost demand for gold, and diminish the power of the US Dollar

The BRICS Countries

The acronym BRIC was first used by Jim O’Neill, chair of Goldman Sachs Asset Management, in 2001, referring to Brazil, Russia, India and China. In almost a quarter of a century, things have changed and these nations have become a geopolitical bloc in their own right. Their governments are meeting on an annual basis and coordinating multilateral policies.

Moreover, the list of countries included in this intergovernmental organization has increased, first with the addition of South Africa and more recently when Iran, Egypt, Ethiopia and the United Arab Emirates joined the bloc.

Why is BRICS Launching a Gold-backed Currency?

The goal of this intriguing project is well known: the BRICS countries are trying to create a more stable and independent monetary system, reducing the risks of devaluation and volatility. A gold-backed currency would be less volatile and less susceptible to macroeconomic events and the monetary policies of Western economies.

Currently, the US dollar largely dominates the global trading system, and this is unlikely to change anytime soon. However, a BRICS gold-backed currency could cause this scenario to shift over time, reducing the power of the US Dollar as the world’s reserve currency.

Consider the expansion of the economy of BRICS countries. The demographic numbers are impressive: in 2023 the estimated population of the BRICS countries was above 3.25 billion people, over 40% of the world population. In other words, the demographic factors are supportive of the growth of BRICS economies.

Potential Impact on Gold Demand

The BRICS countries’ central banks have significantly increased their gold holdings in the last two decades. In 2000, BRICS countries’ central bank reserves were mostly in USD, while now the percentage has shifted significantly into gold.

The success of the BRICS currency would further increase the demand for bullion from those central banks, but also on a larger scale. Gold, unlike fiat currencies, cannot be printed at will. This will likely be reflected in the price of gold expressed in the US Dollar, euro, yen and other fiat currencies. Silver could also be impacted, as covered in Kinesis’ Live from the Vault series.

The success of this project, which is by no means clear at this stage, could push the gold price higher, but will also determine changes in the whole economy. A report released by the London-based company CrossBorder Capital, called the proposed BRICS introduction of a new gold standard the most significant event – from a global financial point of view – since the 1971 abolition of the gold standard.

Potential Economic Impact on BRICS Nations

What are the potential benefits of a gold-backed currency for the BRICS countries? 

The list seems to be relatively long. 

Gold at the centre of a new monetary system could enable BRICS countries to gain greater independence through reduced reliance on the USD and other major currencies, particularly if the new coinage becomes an accepted alternative to the existing reserve currencies.

A common currency could also facilitate more efficient trade rules and processes between the bloc of countries using this monetary system. In this hypothetical scenario, BRICS nations could increase their influence in global trade and financial markets, attracting more investment and reducing the dominance of Western financial institutions.

The success of the project could generate a more multipolar financial system, further diversifying the global financial landscape. Another point, which could be positive for BRICS, is related to greater financial stability and lower inflation risks.

What are the Challenges of a New Currency?

Launching a new currency is not necessarily an easy process. As it stands, there are plenty of unresolved questions regarding how the currency will work. Moreover, the success of the initiative will require significant coordination and a solid agreement between the BRICS nations. While these countries agree on many points, they are also at vastly different levels of economic development and financial and political stability.

The new currency would need to gain the trust and acceptance from the global markets. This means that BRICS political leaders will need to summon the political will to push forward the reforms needed to make this initiative successful, challenging potential resistance from Western countries.

The idea of a BRICS gold-backed currency could represent an interesting and ambitious experiment, which could have significant impacts on the current global economic system. At the same time, it will be a long road to transform the concept into reality, with many challenges still unresolved for the initiative to succeed.