For making the new currency as good as gold, a truly sound currency, it must be convertible into gold on demand. Using gold as money, the unit of account would be a true game changer, no doubt about it… Against this gold stock, the new bank could, say, grant financing loans to exporters, and issue the “new currency”. Or BRICS exports will be sold against the “new currency” and/or gold.
That commentary comes from an interview with Thorsten Polleit over the weekend.
Polleit is the chief economist at Degussa Goldhandel. It’s a precious metals trading company based in Germany. Polleit was commenting on big news that broke over the weekend.
Word leaked that the BRICS bloc – Brazil, Russia, India, China, and South Africa – plan to introduce a new currency backed by gold. In light of this, 41 countries have applied for BRICS membership.
Now, nothing is official yet. Sources expect the official announcement to come during the BRICS summit in August. The event will take place in South Africa.
That being the case, we shouldn’t give this news too much credibility yet. Any time there’s a leak like this, we have to wonder – who wants people to believe this and why?
So there’s a chance this is just a bluff on the world’s geopolitical chess board. After all, who will put up the gold necessary to back such a currency?
To make it work, countries like China and Russia would likely have to contribute significantly more gold than the others. That’s because they have far more gold in their possession.
Would they be willing to pledge their own gold hoard for the good of the project?
Maybe. Both China and Russia are among the world’s leading export countries. That means they stand to accumulate the gold-backed currency if the BRICS bloc were to establish such a system.
Still, there are plenty of questions unanswered here. So I’ll reserve judgment.
That said, this could be the start of gold re-monetization around the world. We talked about this possibility a few weeks ago.
For the BRICS bloc, this is all about creating a credible alternative to the US dollar-based international settlement system. They are seeking to build a trade network that’s not under the thumb of the powers that be in the US and Europe.
A gold-backed currency would generate instant trust in their new system. And they need trust if they want other countries to migrate to their trade network. That’s why a move to gold makes sense.
And if the BRICS re-monetize gold, the US may have to follow suit.
One of the major benefits to having the US dollar serve as the world’s reserve currency is that it creates a constant demand for Treasury bonds. Foreign actors who receive US dollars in exchange for international trade can recycle those dollars back into Treasury bonds to earn a yield.
This is what’s allowed the US to run massive budget deficits year after year. The Treasury finances that budget deficit through new Treasury bond sales… which means it needs willing investors.
But if a chunk of world trade moves to a gold-backed settlement system, international demand for dollars will plummet. Then demand for Treasuries will fall accordingly. That will make it much harder for the US to run $1 trillion+ deficits going forward.
For the Treasury, the answer may be to partially re-monetize gold itself.
Suppose the US government agrees to settle a specific portion of Treasury bonds in gold. That could lend itself to a tiered system of sorts. The Treasury could sell bonds with various degrees of gold backing at corresponding rates.
For example, 10% gold-backed Treasury bonds would carry a lower interest rate than 5% gold-backed bonds. And both would carry a lower rate than Treasuries with no gold backing.
This could help the US Treasury maintain international demand for its bonds. In turn, that would help the US government manage its debt service costs even as rates rise.
Of course, there are tons of wild cards and unknowns in here. We can’t be sure exactly how it would all play out.
But if we do see gold re-monetized, we can be sure that the price of gold is going to explode higher…
-Joe Withrow
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