Russia confirms BRICS will create a gold-backed currency
The gold market could see new bullish momentum as the world could see a new type of gold standard.
Friday, according to state-run RT, the Russian government has confirmed that Brazil, Russia, India, China and South Africa, also known as BRICS nations, will introduce a new trading currency backed by gold. The official announcement is expected to be made during the BRICS summit in August in South Africa.
The latest news is adding new momentum to the ongoing de-dollarization trend unfolding in the global economy. Since mid-2022, central banks worldwide have been buying gold at a historic pace in part to diversify their reserve away from the U.S. dollar.
For many analysts, a gold-backed currency is the next evolution in this process. Many analysts have seen China's recent gold purchases as an attempt to bring international credibility to the yuan.
At the same time, the U.S. government's weaponization of the U.S. dollar against Russia for invading Ukraine has created some geopolitical uncertainty among some nations allied with Russia.
While the prospect of a gold-backed BRICS currency will provide significant support to gold, some analysts expect that it will take time before the impact is felt in the market.
Thorsten Polleit, chief economist at Degussa, said that while the announcement is a step in the right direction, there is still a long way to go to become reality.
"At first glance, a new transaction unit, backed by gold, sounds like good money – and it could be, first and foremost, a major challenge to the US dollar's hegemony," he said in an exclusive comment to Kitco News.
However, Polleit added that the devil is in the details.
Polleit added that another option would be for the BRICS nation to create a new bank for financing foreign trade that would require holding gold as capital.
Naeem Aslam, chief investment officer at Zaye Capital Markets, said that while this could provide long-term support for gold, the precious metal continues to face short-term challenges. He added that despite the announcement, the world is still far from seeing a gold-backed currency.
"But this doesn't mean this can't be achieved at all," he said. "For now, any additional positive news on this could certainly help the gold price, but more importantly, traders are now going to be focused on the US CPI data, which is due next week."
Other analysts remain highly doubtful about the announcement.
Many analysts have been speculating about a new global currency to challenge the U.S. dollar's role as the world's reserve currency. In late March, Former Goldman Sachs chief economist Jim O'Neill wrote in a paper published in the Global Policy Journal that the U.S. dollar's dominance is destabilizing global monetary policies. He added that a BRICS currency, challenging the U.S. dollar's dominance, would bring stability to the global economy.
"Whenever the Federal Reserve Board has embarked on periods of monetary tightening, or the opposite, loosening, the consequences on the value of the dollar and the knock-on effects have been dramatic," he said.
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