“We welcome the use of local currencies in financial transactions between BRICS countries and their trading partners, calling for the establishment of a BRICS Cross-Border Payments Initiative. The document also supports the BRICS New Development Bank’s financing projects in local currencies and its growth into a premier multilateral development institution.”

The above paragraphs appeared in the BRICS Kazan declaration, following the summit meeting on 22^nd October. The event was not given a lot of coverage; the “B”, Brazil, did not attend in person, with the country’s president attending remotely after suffered a head injury.

While this is only an initial step, there are potential ramifications for the current world order, and for investors.  The apparent goal of this organization is to establish an alternative structure to the global order that America and her allies have dominated since World War II.

One of the targets is to establish a BRICS currency with underlying assets of 40% gold and 60% local currencies. Is it any wonder that gold prices are in a strong bull market, and have outperformed every major equity index this year? More importantly this strong uptrend has occurred when the traditional economic drivers of gold, such as a strong US dollar and higher interest rates, have historically been headwinds for gold.

Faced with this large wall central bank buying (and it’s not just the BRICS, many other western central banks have also been accumulating gold), it’s little wonder that gold is in a bull market. The total global value of above-ground gold is approximately US$15 trillion. Almost half of this is in the form of jewelry. $2.2 trillion is tied up in industrial use, and $2.5 trillion is locked away in central bank vaults. That leaves tradable gold stock at just $3.4 trillion.  Annual mine production of gold is approximately US$250 billion, less than 2% of the total gold available.  All this together pales against a combined market capitalization of global equities and bonds of US$260 trillion. Just a 1% global allocation shift from stocks and bonds to gold would amount to 76% of the tradable pool of gold.

Ray Dalio said it best: “If you don’t own gold, you know neither history nor economics.”

The new BRICS currency would establish an investment and payment structure that bypasses the US Dollar. Approximately 59% of global reserves are currently in dollars, and world trade is dominated in this currency. However this means that every payment in dollars has to go through the US banking system, giving America the ability to police and (most importantly) stop such payments.

According to the BRICS Chairmanship Research, as published by the Russian Ministry of Finance and the Bank of Russia, around USD 300 billion of Russia’s assets have been frozen since 2022. Venezuela had 31 tons of gold frozen in 2018. Iran had over USD 100 billion frozen in 2018. Libya had 168 billion frozen in 2011.

Does this BRICS project have any chance of displacing the dollar as the global reserve currency, and reduce the global influence of the US as the sole global super-power?

The combined GDP of the BRICS countries in 2021 was 35 per cent of world GDP, overtaking the G7’s 30 per cent share. BRICS is made up of faster growing countries, the share of world GDP will increase in the future. Many of the world’s agriculture needs and natural resources are produced in the BRICS+ countries, which includes the original BRICS members, plus those who have lodged requests to join the organization, as well as the additional 12 partner countries.

It is still far too early to see whether this initiative will come to fruition, given the disparate goals of many of the member countries. The BRICS+ initiative will need to surmount extremely large hurdles; just last week Brazil expressed its interest in withdrawing from China’s Belt/Road initiative.

The US dollar’s share of global reserves, which is currently at 59%, has been reduced from 72% in 2000. However at this current level it is still by far the world’s reserve currency. During this period China’s Yuan grew from zero to just 2.6%, so it is not a threat to the dollar’s supremacy anytime soon.  But this BRICS initiative could put a larger dent in the dollar’s supremacy.

While the project’s success may not be a high probability event, investors should pay attention to the developments. A world where the US currency is no longer the world’s reserve currency would have significant implications for investors’ portfolios over the coming decades.