Gold BRIC Currency Moving Forwards

Over the last year, there has been growing debate about the need for an alternative international currency system, separate from the dominant US dollar and euro. While there have been many rumors and tentative statements about a dedicated "BRICS" currency, to serve emerging economies, the program now appears to be gaining momentum. A forthcoming meeting of representatives from Brazil, Russia, India, and China next month may see this initiative formally announced.

A consortium led by Russia and China has settled on gold as the basis for this new monetary framework, harking back to the Bretton Woods conference of 1944, which established a gold-based international currency architecture at the end of the Second World War. While previous attempts to reintroduce gold-backed currencies have been made, the current geopolitical landscape and the need for financial independence have revitalized interest in a gold standard system.

There has been plenty of speculation and (often misinformed) opinion that this will spell the end of the US dollar. However, the introduction of a gold-backed currency, its chances of success, and its impacts, are far from straightforward.

A Return To The Gold Standard?

The Bretton Woods agreement of 1944 aimed to bring stability to the global economy following the turmoil of the Great Depression. It anchored the international monetary system to the US dollar, which was in turn tied to gold at a fixed rate of $35 per ounce. This system fostered two decades of peace, prosperity, and fixed exchange rates until the United States unilaterally abandoned the gold standard in 1971.

In recent years, notable figures and countries have expressed renewed interest in a gold standard system. Several proposals for gold-based currencies have emerged, such as Malaysia's Pan-Asian gold-backed currency, Libya's Pan-African gold dinar, and most recently Zimbabwe's digital gold tokens, but none have gained traction—yet.

The invasion of Ukraine and subsequent isolation of Russia from the Western financial system intensified the urgency for alternative arrangements. With the freezing of foreign assets and the potential confiscation of funds held in US and EU custody, governments worldwide recognized the implications of their dependence on the US dollar and euro. This situation highlighted the vulnerability of countries that are hostile to the US but that still rely on the existing financial infrastructure and reserve currency, prompting discussions about establishing independent systems based on gold.

Zhou Xiaochuan, former head of China's central bank, highlighted the need for an international reserve currency anchored to a stable benchmark, suggesting that gold could play a role. Russia's Sergey Glazyev even proposed a "Gold Ruble 3.0" and explored the establishment of a gold-based cryptocurrency with Iran.

Now, these ideas seem to have moved into a new, more active phase.

Challenges To A New Gold Standard

Implementing a gold standard system would require overcoming several difficulties. Governments would need to navigate the independence of the International Monetary Fund (IMF), which currently discourages gold-based currencies among its member countries. However, proponents argue that a gold standard could stabilize currency values without disrupting existing electronic payment systems. Historical evidence suggests that gold has maintained relatively stable value over the long term (in terms of purchasing power), making it an attractive universal standard of value.

Economist Peter St Onge highlights some of the difficulties in getting a gold-backed currency off the ground, including ensuring it is adequately backed to instill the necessary confidence. He also notes that Russia has talked a lot about a gold-backed currency for years, without actually doing anything about it. Moreover, India, the fifth-largest economy in the world, has stated that it will not be involved in the effort. It is clear that gold cannot be used to back an existing currency, due to the devastating impact this would have on exports, and so any gold-backed currency would effectively be an additional payment rail.

Gold And BTC

The return of the gold standard as the foundation of a new international currency system represents a significant development in global finance. While previous attempts to reintroduce gold-backed currencies have fallen short, current geopolitical dynamics and the need for financial independence have reignited interest in this alternative.

Alongside these developments, bitcoin is also seeing new traction as "Digital Gold" or "Gold 2.0": An asset that, like physical gold, is truly international and exists outside of the current geopolitical loyalties. This was the case made by BlackRock CEO Larry Fink, who is spearheading the effort to launch a Bitcoin spot ETF. Additionally, BTC is gaining interest as the currency of the AI sector, due to the ability to guarantee fast, secure, censorship-resistant transactions with 24/7/365 availability.

Finally, if a gold-backed currency were created, and if it gained any degree of traction, then the US dollar's status as global reserve currency would be impacted and this would have serious consequences.

Nonetheless, that's an unlikely scenario, for the reasons stated above, and especially within the foreseeable future.

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