BRICS TRADE CURRENCY: DEFERRED OR DITCHED? / MACLEOD FINANCE

BRICS trade currency: deferred or ditched?

Last Friday, President Putin ruled out a new BRICS currency for now saying that it is not under consideration, promoting trade settlement in national currencies instead. 

ALASDAIR MACLEOD

The idea of a common BRICS gold-backed currency was first mooted over a year ago, with the Russian embassy in Nairobi leaking that it would be on the Johannesburg summit agenda in August 2023. 

It didn’t make it, with India firmly opposed, and China seemingly lukewarm. 

Clearly, disagreements have continued through the Russian presidency. 

And the larger BRICS becomes, the less likely a currency will be agreed upon.

But then, why is the gold price still rising? 

I’ll come to that later.

I think we can now rule out a BRICS trade settlement currency. 

Putin’s follow-up statement about exploring the use of digital currencies in mutual trade and investments is utterly meaningless. 

A currency is a currency digital in form already. 

It is credit which can be created by any bank, so long as it has access to an interbank settlement facility to keep its books balanced. 

Central banks already issue it to commercial banks, and the idea that central banks should issue it to invest and finance commercial enterprises as the Bank for International Settlements proposes, with or without a blockchain, is not just inflationary but preposterous.

Instead, Putin confirmed that BRICS nations would continue to use national currencies to settle trade. 

This is inevitable while India says that it is not interested in the de-dollarisation agenda and will continue to use dollars as it sees fit. 

It highlights a reality, that the diversity of national agendas under the BRICS umbrella makes agreement on virtually anything other than access to markets increasingly difficult as the membership expands. 

For this reason, it seems sensible to introduce a class of associate membership, or partnerships, for the 30-odd nations seeking to join, only offering them full membership in due course when circumstances and opportunities permit.

In his statement, Putin didn’t rule out a trade settlement currency entirely — only that it was premature. 

The mood music out of Moscow tells us that he is in favour of it with gold backing, perhaps for political reasons. 

He surely understands that to return gold backing to any currency is a frontal attack on the dollar and by crippling the US’s financing machinery it could call a halt to attacks on Russia.

The Americans are highly sensitive to this issue: Ask Colonel Ghaddafi’s or Sadam Hussein’s ghosts if your séance session permits, both of which reputedly expressed interest in remonetising gold. 

Not being a national currency identifiable with an attackable jurisdiction, a gold-backed trade settlement currency for BRICS might have been harder for the US to counteract. 

And the damage to the unclothed fiat emperor might be lightly less obvious at first.

China is likely to see consistent deficits on raw material imports offset by consumer product sales and outward investment. 

Russia’s imports from BRICS are unlikely to be material, instead being a net exporter particularly of energy and therefore a net receiver of weak currencies. 

Doubtless, this was one reason behind Russia’s desire to introduce a sound trade settlement currency. 

Instead, the de-dollarisation policy will depend on BRICS Pay or similar, a replacement for SWIFT with the added feature of matching currency settlements directly without the interposition of the dollar. 

That is still in development.

The dollar’s danger

We now turn our attention to the dollar, which is undeniably in a debt trap, increasingly plain for its creditors to see. 

China has been dumping dollars, we have assumed to be the consequence of her de-dollarisation policies. 

But the movers and shakers in Beijing are not fools: they can see the dollar’s debt trap, understand that there is nothing they can do about it, and if anything their de-dollarisation is only bringing forward the date of the dollar’s crisis. 

Japanese private sector investors are now the largest foreign group holding dollars, and some of them are trying to limit their losses and get out as well.

Increasingly Japanese banks, pension funds, and insurance companies can now foresee a US funding crisis, likely to be considerably worse if Trump gets elected as the bookies now predict (Trump 11/18 on, Harris 13/8 against).

 Whichever way you look at it, his protectionist plans will increase consumer price inflation. 

And the larger budget deficit will undermine the currency, leading to higher not lower interest rates. 

It promises a trainwreck for the dollar, and we can be sure that this prospect is accelerating the current surge out of dollars into gold.

Gold’s current bullish move started just over a year ago from $1840. 

The acceleration in recent days has been notable, accompanying Trump’s improvement in the opinion polls. 

Let’s look at this from the Asian hegemons and their close allies’ point of view. 

The chart below, of the dollar gold price inverted is actually of the dollar’s loss of value relative to gold, which as we know is real money while the dollar is credit depending for its value on no more than foreigners’ collective faith in the US Government:

That’s one sick dollar and the acceleration of this decline is alarming. 

Do foreigners really want to keep $32 trillion locked up in this failing fiat currency?

We now turn our attention to the supply of gold to meet this demand. 

It so happens that Ross Norman, a well-informed London-based analyst, commentator, and CEO of Metals Daily provided us with some numbers only this week. *

Norman assesses bullion supply as being the sum of 2,125 tonnes mined plus 720 tonnes of scrap since 1 March, totalling 2,850 tonnes. 

He can only account for demand of 1,480 tonnes, leaving a mystery over the buyers of the remaining 1,370 tonnes.

I am convinced the answer is simple. 

According to the World Gold Council, the combined mine output of the Asian hegemons, the ex-Soviet CIS states in central Asia, and other associated states last year was 1,232 tonnes. 

Throw in their portion of scrap and there are about 1,400—1,500 tonnes of supply, most of which is withheld from western capital markets and therefore not reflected in the statistics available. 

This excess supply simply satisfies a continuation of Asian demand which has been supplied by western sources for the last two decades — longer if you include Chinese stealth buying from the mid-eighties onwards.

Some of this demand should be evident in customs statistics for non-monetary gold. 

That it is not suggests that it is either not recorded or being booked as monetary gold for which no customs returns are made. 

If the latter is the case, then the buyers of this missing gold supply are central banks and governments.

It raises an important point. 

Despite the absence of a much-mooted BRICS gold settlement currency, which they would have known about for months, Asian governments and their central banks are still buying gold and continuing to do so even after President Putin told us the new currency was premature. 

There can only be one reason: Asian governments and those close to them are bailing out of western paper.

There are also early signs of a flight out of risk developing in western capital markets. 

Against the principal foreign currencies, including China’s yuan, the dollar has been rising at the same time as falling against gold. 

And despite the supposed downward trend in US interest rates, term yields for US Treasury notes and bonds are rising sharply. 

It is consistent with US capital markets themselves reflecting growing credit risk and a flight out of duration. 

And with a record valuation disparity relative to bonds, US equities are set to see substantial falls as well.

In conclusion, the BRICS meeting in Kazan is very important, but in a geopolitical rather than a financial sense. 

A rising dollar gold price is less about event-driven bullish speculation about the reintroduction of gold by BRICS for trade settlement purposes, and more about a paradigm shift in the relationship between fiat credit and real money, which is physical gold. 

And with big Asian players now panicking out of dollars and its fiat dependents while their opposite numbers in the west are selling lesser currencies should tell us that the entire structure of unattached western credit is at risk of collapse much sooner than even those who see these dangers might think.

We are unlikely to ever see a BRICS trade settlement currency before a dollar crisis changes the international landscape, so can assume the idea is stillborn. 

Instead, all that gold in Asian government hands is likely to be used defensively to stop their currencies from being dragged down with the dollar’s collapse — which though we might not know it yet, is already underway.

A word to the wise: get out of credit!