The idea of a gold backed currency issued by the BRICS countries (Brazil, Russia, India, China and South Africa) has been circulating for a while, especially among some alternative media outlets and gold enthusiasts. The proponents of this idea argue that such a currency would challenge the dominance of the US dollar and provide a more stable and fairer alternative for international trade and finance. However, there are many challenges and obstacles that make this idea very unlikely to materialize, at least in the foreseeable future.
First of all, let’s clarify what a gold backed currency means. A gold backed currency is a type of currency that is convertible into a fixed amount of gold at any time, either by the issuing authority or by the holders of the currency. This means that the value of the currency is determined by the market price of gold, and that the issuing authority has to maintain sufficient gold reserves to back up its currency in circulation.
A gold backed currency is different from a gold standard, which is a system where the exchange rate between different currencies is fixed according to their gold content or parity. Under a gold standard, the issuing authorities do not necessarily have to hold gold reserves, as long as they maintain the fixed exchange rate with other currencies. There is no economic rationale or incentive for the BRICS countries to adopt a gold-backed currency. A gold-backed currency would limit their monetary sovereignty and policy flexibility, as they would have to maintain a fixed exchange rate with gold and adjust their money supply accordingly.
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This would constrain their ability to respond to external shocks, such as commodity price fluctuations, trade imbalances, capital flows and financial crises. It would also expose them to speculative attacks and currency wars from other countries that could manipulate the gold market or devalue their own currencies.
A gold backed currency is also different from a fiat currency, which is a type of currency that is not backed by any physical commodity or asset, but by the confidence and trust of its users and the credibility and stability of its issuer. A fiat currency derives its value from the supply and demand of money in the economy, and from the monetary policy of its issuer. A gold-backed currency would require a large and stable stock of gold reserves, a credible and transparent mechanism to audit and verify them, a secure and efficient system to transfer and settle them, and a widespread acceptance and trust from the public and the international community.
None of these conditions are met by the BRICS countries at the moment. Their gold reserves are relatively small compared to their GDPs and trade volumes, their auditing and reporting standards are questionable or inconsistent, their payment systems are fragmented or underdeveloped, and their currencies are not widely used or trusted outside their borders.
The US dollar is currently the most widely used fiat currency in the world, and it serves as the global reserve currency, meaning that most countries hold a large portion of their foreign exchange reserves in US dollars, and that most international transactions are denominated and settled in US dollars. The US dollar also benefits from the so-called petrodollar system, which refers to the fact that most oil producing countries sell their oil in US dollars, creating a constant demand for the greenback.
The US dollar has been a fiat currency since 1971, when President Nixon ended the convertibility of the dollar into gold, effectively ending the Bretton Woods system that had been established after World War II. The Bretton Woods system was a type of gold standard, where most currencies were pegged to the US dollar, which in turn was convertible into gold at $35 per ounce.
The main advantage of a fiat currency is that it gives more flexibility and autonomy to its issuer to conduct monetary policy according to its economic needs and objectives. A fiat currency can be adjusted in value through interest rate changes, quantitative easing, or exchange rate interventions, depending on the economic situation and goals of its issuer.
The main disadvantage of a fiat currency is that it can be subject to inflation or deflation, depending on how well its issuer manages its money supply and demand. A fiat currency can also lose its value or credibility if its issuer becomes insolvent, defaults on its debt obligations, or faces political or social instability.
A gold backed currency, on the other hand, has some advantages and disadvantages compared to a fiat currency. The main advantage of a gold backed currency is that it provides more stability and certainty to its users and holders, as its value is determined by the market price of gold, which is relatively stable and predictable over time. A gold backed currency also reduces the risk of inflation or hyperinflation, as its supply cannot be increased arbitrarily by its issuer.
The main disadvantage of a gold backed currency is that it limits the flexibility and autonomy of its issuer to conduct monetary policy according to its economic needs and objectives. A gold backed currency cannot be adjusted in value through interest rate changes, quantitative easing, or exchange rate interventions.