Could a BRICS Currency be Backed by Gold?

What are the BRICS nations?

The notion of a bloc of nations helmed by Brazil, Russia, India and China was first posited in 2001 by Goldman Sachs (NYSE:GS) Chief Economist Jim O’Neill. He initially identified the countries for holding important investment opportunities and believed they would come to form a dominant economic power by the middle of the 21st century.

In September 2006, his theory became reality when bilateral meetings between the countries occurred on the sidelines of the UN General Assembly, leading to a series of high-level talks between the nations in the following years.

The first formal meeting of BRICS leaders was held in Russia in 2009 between Luiz Inacio Lula da Silva, president of Brazil; Dmitry Medvedev, former president of Russia; Manmohan Singh, former prime minister of India; and Hu Juntao, formerly both president of China and general secretary of the Communist Party of China. South Africa was a later addition; it was granted full membership at the BRICS' annual meeting in 2011.

Even though China, India and Russia have long been key players in the global economy, the BRICS nations are largely on the outside of many intergovernmental groups made up of developed nations, including the Group of Seven. BRICS countries don’t have the same influence as their western counterparts, which hold positions at the World Bank and the International Monetary Fund, two key organizations for international trade and global economic policy.

The group formed as a way to encourage more economic growth and cooperation among member countries and developing nations, while requiring less input from western powers.

How would a gold-backed BRICS currency work?

In his talk at the New Orleans’ Investment Conference, Rickards explained how that could happen, using the euro to show how a BRICS currency might operate. He noted that using a common currency doesn’t mean countries need to have a common fiscal policy or bond market; however, this is where the commonality with the euro ends for Rickards, as he doesn’t see a BRICS currency being backed by a central bank. Rather, its value would be tied to gold.

Importantly, he doesn't believe this would mean a return to the gold standard. “(With) a real gold standard, you can take the currency and go to any one of the central banks and get some gold,” he said. Instead, he believes a BRICS currency would be tied to a certain weight in gold. For example, 1 BRICS currency unit could be tied to the value of 1 ounce of gold.

In Rickards' view, this won’t mean the end of the US dollar; because gold is traded in the US dollar, a BRICS currency would still have a direct relation to the dollar. “So if gold went up to US$3,000 (per ounce) from US$1,900, what actually happens is a 28 percent gain against the US dollar,” he said on stage at the event.

“With BRICS they don’t have to own any gold, they don’t have to buy any gold, they don’t have to prop up the price. They can just rise on the dollar gold market,” he continued. “What do you think is going to happen to the dollar over time?” Rickards' implication was that, if a BRICS currency were to gain value against the US dollar, the US dollar would lose value against that currency, essentially destabilizing the US dollar.

Ultimately, Rickards expects the US dollar to collapse. He pointed out that the BRICS+ bloc of 11 nations represents 15 percent of global gold reserves, 30 percent of land, 40 percent of the world’s population and 54 percent of its GDP.

“We’re trading closer to a point where the BRICS are in control of overland routes and choke points around the world,” he said. “Don’t look for the dollar to go away anytime soon, but look for a much higher dollar price of gold, and a much weaker dollar and the BRICS coming into their own.”