In August 2023, the 15th BRICS Summit took place in South Africa. Led by Brazil, Russia, India, China, and South Africa - whose initials give this group of nations its name - the event happened against the backdrop of the ongoing war between Russia and Ukraine.
But geopolitics wasn’t the only key issue on the agenda: the other hot topic was the creation of a new common currency.
In economic terms this could be a bombshell, not least for the United States dollar. A rival global currency could seriously undermine USD as the international currency of choice.
BRICS countries could launch the currency before the end of 2024. As that might to lead to a global economic power shift, we wanted to consider the potential impact on other currencies, but also the effect on gold.
Why are BRICS countries creating a common currency?
After the First and Second World Wars the US was at the height of its political power, enjoying global dominance in international relations. 🌎
The country also succeeded in making the dollar the dominant currency for major global trade. In other words: no dollars, no oil.
This dependence on the dollar exposes the BRICS to risks related to dollar fluctuations, as well as to sanctions by the US - such as in times of conflict - that can limit a country's financial resources. Russia has been hit with such sanctions since the outbreak of its war with Ukraine.
Are we Headed for ‘Dedollarisation’?
Now, the party may be ending for the dollar. That’s because the concept of ‘dedollarization’ - the incremental, strategic undermining of the dollar’s global economic power - has intensified during the past few years.
While the BRICS common currency project is yet to officially materialise, this group of countries has long played a central role in dedollarization strategy. BRICS nations represented more than 26% of the world's GDP in 2023; they intend to diversify their foreign exchange reserves and promote the use of their national currencies.
China, in particular, has promoted the use of the yuan in international transactions and currency swap agreements. Russia has also stepped up efforts to reduce its dependence on the dollar, favouring trade in rubles and yuan.
If you need evidence these decisions are working as planned, consider this: by the end of 2023, USD accounted for approximately 58% of global foreign exchange reserves, compared to more than 70% in the 1990s. 📉
What’s the latest with BRICS common currency?
Even though the BRICS common currency project has been making headlines since its announcement in 2023, few details have emerged.
But we know that significant challenges remain to be solved. Among the key tasks required to establish the new currency are:
- the creation of a supranational central bank
- building trust and encouraging widespread adoption of the currency.
With official details few and far between, experts understandably remain divided on whether the project can succeed. One commonly aired concern is the economic and political differences among member countries, causing some countries - not least India - to be hesitant about adopting the new currency.
What could be the economic impact of this new BRICS currency?
It’s too early to say, as the impact depends on how successfully the new common currency is integrated into the global economy.
Broadly, two scenarios seem possible:
- A coexistence between local currencies and the BRICS currency 🤝, primarily used in international trade and/or specific transactions (e.g. commodities);
- A gradual replacement of local currencies by the new super-common currency; similar to what happened with the Eurozone countries in 2002.
Can the dollar compete with the BRICS currency?
In theory, the BRICS' common currency could rapidly become one of the most widely used currencies in the world. After all, the combined BRICS country populations total 3.3 billion people, compared to 800 million in G7 countries.
This could significantly reduce demand for the dollar, decreasing its value. Currently, the dollar is seen as a store of value simply due to its dominance in global trade.
Weakening the dollar could lay the groundwork for a new global monetary system.
Could gold be affected by the BRICS currency?
Once again, we’re speculating. For the past two years, theories have circulated about the new BRICS common currency potentially being backed by a basket of commodities - including gold. This strategy would allow the new currency to fulfil its role as a store of value, similar to how the dollar works now.
In this scenario, BRICS countries would have every incentive to continue increasing their gold reserves to support the value of their new currency. It’s worth noting that they are already among the largest gold buyers. In 2023, China added 102 metric tons (MT) of gold to its reserves, while Russia added 31.1 MT. This could boost global demand for gold, driving up its price.
This possibility should be taken with a pinch of salt, however. Recent statements from the Kremlin suggest the new currency could link to cryptocurrencies and Blockchain. It’s definitely one to keep an eye on! 🔍
⭐ A new favourable era for gold?
Several theories support a potential rise in gold prices:
- Market distrust of the new BRICS currency could see investors acquiring gold as a hedge against potential risks associated with the currency;
- A weakening dollar may prompt countries to diversify their foreign exchange reserves with gold;
- The creation of a new global monetary system could cause anxiety that prompts a ‘gold rush’ by investors and states.
As we await further news of a new common currency one thing is certain: the fact that the project even exists marks a major turning point in the era of dedollarization.
Because gold and the dollar are intrinsically linked, the BRICS project will inevitably impact the price of gold, which has reached record levels during 2024.
There is every chance these developments will further boost gold’s price. Now seems a good time to invest!
