The Limits of BRICS Currency Backed by Gold And Why Currency SWAP Regime Is More Promising

The BRICS nations – Brazil, Russia, India, China, South Africa and plus – want to abandon the US dollars for a “BRICS currency”, ditching SWIFT while anchoring everything on gold: “Recently, the BRICS nations have been exploring groundbreaking initiatives aimed at reshaping the global financial landscape. Among these initiatives are the creation of an alternative financial messaging system akin to the Western-dominated SWIFT (Society for Worldwide Interbank Financial Telecommunication) system and the development of a new gold-backed currency.”

My take: these countries will score own-goals if they think they can use gold to back the planned BRICS currency, which is being designed to rival the US dollars. Here is an advantage of a gold-backed currency as advocates explain: “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.”

I do not buy that and this has been my position. In our modern global economy, using gold to back any currency in a free mercantilist economy (you are better by increasing export and trade) is an illusion. Using the US which has data on everything, the nation has about 8,133 metric tons in gold reserves which comes down to about $500 billion. Simply, if you melt all the physical gold in America, it is not worth up to 20% of the value of Apple Inc. At a deeper level, markets have priced Apple more because it has more value! 

Globally (including the BRICs nations), in all forms and nature including bullions, jewelry, derivatives, private placements, stocks, etc, the value of gold is about $13 trillion. The world economy is about $105 trillion; there is no way gold in all forms will back that economic size, even for the BRICS countries, unless we move to the imperial age.

What that means is that gold cannot support the BRICS currency efficiently because of the asymmetrical imbalance where the GDP of China alone is larger than the value of known gold, in all forms, in the world. Of course, they can launch a currency, but that currency will be like the types we have seen in Zimbabwe and Venezuela which no one wants to use for something serious.

More so, if they adopt a single currency, the flexibility which comes to the independent central banks will go, since that currency will have a supranational apex bank for its governance. That 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.

Russia is surviving Ukraine-anchored sanctions because it has used interest rates to save the ruble, its currency. China last week depended on the same interest rate to adjust for growth. Under a BRICs currency, anchored on gold, that interest rate tool would be severely limited.

Good People, currency union is challenging when economies are heterogeneous in nature, and in BRICS, none seems similar, making welfare losses possible, and that is why BRICS currency, anchored on gold, will not be effective. Rather, currency swaps will reign! Yes, they can swap currencies with no need of converging on the US dollars.

LinkedIn Summary as comment: A gold backed BRICS currency is impractical due to the limited global gold supply relative to economic size and the inherent economic diversity among BRICS nations. The rigidity of a gold standard would hinder monetary policy flexibility and technological innovation. Instead, I think currency swaps and diversified financial systems offer a more viable solution, promoting flexibility, reducing dependence on the US dollar, and enhancing economic cooperation.

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