Will gold pave the yellow BRICS road?
Issue 71
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Today’s Bullets:
What is BRICS?
US off the Gold Standard
How would BRICS’ gold work?
Should the US be worried?
Inspirational Tweet:
In what seems to be a direct attack on the US dollar (and other western currencies), the BRICS nations recently announce a plan to introduce a gold-backed currency for the nation bloc.
But what is BRICS, what power do they really have, and why should we care anyway?
If this seems too complex to research and contemplate yourself, no worry. We’ll break it down, nice and easy as always, for you here.
So, saddle up and settle in for a walk down the yellow BRIC road today with The Informationist.
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🧱 What is BRICS?
We’ve covered this before, recently, but for this of you who are new here or if you want a refresher, BRICS is simply an acronym for a bloc of countries looking to form an economic cooperative.
A non-Western bloc.
These countries are currently, Brazil, Russia, India, China, and South Africa.
BRICS.
And BRICS is seeking a way out of transacting in US dollars.
Why?
In using USD as the primary medium of exchange, the world continues to feed the economic engine of the US, often at the expense of their own economic growth
Because of the need for USDs, these countries must buy and hold USDs and US Treasuries as reserve assets, a negative to them for two reasons:
Control: When the US sanctioned Russia last year, freezing their US Treasury holdings and shutting them out from SWIFT (the worldwide money transfer system), the US demonstrated authoritarian control over any USD denominated asset held in foreign treasuries.
Value: The US Treasury repeatedly prints USD to buy its own debt during times of crisis, expanding the money supply and inducing perpetual inflation. I.e., the USD falls in value every year — and anyone holding USTs or USD loses purchasing power.
Solid reasons to opt out of the USD, actually.
I covered this and much more in a recent newsletter. If you have not seen that and want to dig in further, you can find it right here:
What’s more, eight other countries have already formally applied for membership in the alliance, including, Argentina, Egypt, Saudi Arabia, the United Arab Emirates, Algeria, Bahrain, Indonesia, and Iran.
Plus, dozens of others have “expressed interest”, like Belarus, Mexico, Nicaragua, and Turkey.
Reminder: Turkey and Mexico are both G20 countries, which means they are some of largest and systematically important economies in the world.
So, we’re talking about five G20 members currently in BRICS with potentially five more (Argentina, Indonesia, Mexico, Saudi Arabia, and Turkey) in the future.
That’s half of the total G20 membership.
I’ll let that sink in for a moment while we turn our attention to the western portion of the G20. The UK, EU and in particular, the US.
The State of the Western Fiat Union, you could say.
🫣 US off the Gold Standard
We’ve all watched these last few years as the central banks of the UK, the EU, and the US all printed ungodly amounts of their respective currencies to ‘ensure stable and liquid financial markets’ (read: government bond markets).
No longer backing their currencies with gold (the US fully abandoned Bretton Woods, and hence the gold standard, in 1971), governments can now use their central banks to manufacture more currency to fill gaps created by poor policy and corruption.
Between lockdown stimulus, EU yield curve control, UK Gilt meltdowns, and US regional bank implosions, we’ve seen massive amounts of money printing in the western world recently.
Trillions and trillions and trillions.
And trillions…of it.
The result?
Debt to GDP jumping to near or above 100% in all these regions, with the US taking home this prize, boasting a debt to GDP of 136%.
So, why does this even matter? Who cares how much debt the US has versus GDP?
Well, in truth, it matters quite a bit, and a lot more people should care about the debt load in the US.
Why?
Because higher debt loads lead to higher interest expenses which lead to higher deficits which lead to more debt.
more debt → higher interest rates → higher deficits → more debt
The dreaded debt spiral.
I’ve written extensively about the debt spiral and the US Treasury. If you have not seen those articles and want to learn more, you can find them right here:
And so, the next time we have a credit event, unforeseen market disruption, or even just a deep recession, the US will be forced to print USD in order to keep markets liquid and orderly.
See, they cannot afford to have illiquid markets when they need to fund these perpetual deficits with additional treasuries. In the end, they will print the difference.
The BRICS nations know this, and they’re tired of being beholden to the inflation-diseased US dollar system.
In direct contrast, they’re choosing to opt-out of the USD based system and are looking to create their own network of payments, all settled in a currency that is not printed at will, but rather backed by gold.
🧐 How would BRICS’ gold work?
To put it simply, BRICS nations would have to either use their own currencies that are proven to be sufficiently backed by gold, or agree to a single currency backed by gold.
The first option, multiple currencies, seems a bit unrealistic, considering there would need to be regular and trustworthy audits of each currency in order for that system to work.
I mean, can you really see Xi or Putin letting foreign reps into their vaults to verify gold assets? 🙄
Yeah, me neither.
The second option, though, seems possible, if also not yet probable.
In this case, the BRICS nations would create one central currency that would be backed by gold. A central bank would then finance foreign trade backed by this BRICS currency.
In essence, then, currency would be fully redeemable for gold.
This system would allow for financing trade and loans, etc. with one BRICS currency.
And therein lies the key: creating a multinational BRICS bond market. Here, bonds denominated in the new BRICS currency (which is backed by gold) could be bought in local currencies at the market-set exchange rate.
The gold-backed bonds would then hold their value against any inflation.
Bottom line, though, the BRICS currency must be convertible into gold on demand for it to be truly sound money.
Sounds good. No wonder half the G20 is interested.
So then, should the US be worried now?
🫨 Should the US be worried?
One important note: if Saudi Arabia joins BRICS, then with Russia, BRICS has two of the three largest energy producers attached to its currency. The third being the US.
A BRICS currency would effectively put a proverbial nail (maybe final) in the petrodollar coffin.
Remember, BRICS’ share of global GDP has already surpassed G7’s:
This is what has numerous economists and investors on edge.
But a small reality check now.
In order for BRICS to replace the USD as global reserve currency, they would have to unseat the UST as global reserve asset. The UST has long been regarded as the global financial safe haven security.
This will not just end with a new BRICS currency and a USD whimper.
That said, a new gold-backed BRICS could dent the USD dominance. As you can see in my BRICS article above, the USD is already in a steady decline.
Also, actual physical gold backing is a huge challenge logistically, and while these countries have reportedly been buying hoards of gold recently, it is still nowhere near enough to back a five-country currency that comprises 20%+ of global GDP.
But do I think it’s possible? That that China’s Xi trusts Russia’s Putin who trusts Brazil’s da Silva, and so on? That they can work together and trust each other enough to establish a gold-backed BRICS currency that eventually includes half of the G20 economic giants?
That they can actually pull it off?
Well. Anything is possible, of course. Especially if the US makes another critical policy mistake by sanctioning one of the BRICS nations again.
Possible, yes.
Probable? Still a heavy no.
The reality is that the USD dominance has such a stronghold that it will remain the global reserve currency for the foreseeable future.
That said, the UST has a long-term (and terminal) problem, and that problem will only lead to more USD inflation. And so, I hold a large allocation in my portfolio to gold.
I also hold a large allocation to Bitcoin.
Because in the end, whether it is in ten years or fifty, I believe Bitcoin is the one to eventually unseat the UST as the global reserve asset.
Decentralized, portable, immutable, highly divisible, limited in supply (among other things), Bitcoin checks all the boxes that the UST only wishes it could.
And that, my friend, is real yellow brick road.
That’s it. I hope you feel a little bit smarter knowing about BRICS and the possibility of a gold-backed currency. Before leaving, feel free to respond to this newsletter with questions or future topics of interest.
And if you’re a paid subscriber, don’t forget to leave a comment or answer a comment in our awesome 🧠 Informationist community below!
Talk soon,
James✌️
At what point is holding short-term t-bills a risk? Are there certain markers that would make you cash out?
Thank you for your excellent writings - always clear and concise and humorous (which we need). I especially appreciate your willingness to tell us what you are doing to protect yourself. When I see the ice cube melting, it’s hard not to panic.
Always a must read - thank you, James.