The IMF and the World Bank will soon face a powerful competitor as the BRICS nations have recently agreed to establish their own £50 billion Development Bank and $100 billion Currency Exchange Reserve for its members. How will this affect the dollar and the current price of gold?
Here’s the Back Story:
Brazil, Russia, India, China and South Africa comprise the BRICS nations and represent some of the top emerging economies in the world right now. This means there is actual organic growth in these nations, compared to the economies of the US and Europe, which are heavily reliant on central bank stimulus just to stay afloat.
The BRICS nations have combined foreign-currency reserves of $4.4 trillion and account for 43 percent of the world’s population. They are seeking greater sway in global finance to match their rising economic power. Working together, the BRICS could well emerge as a powerful monetary force to contend with the Western banking system that has controlled global finance for so long.
What Have They Done?
Just last month at a summit meeting in Fortaleza Brazil, the leaders of the five BRICS nations signed an agreement defining how to structure their $50 billion Development Bank. They decided that the BRICS Bank will be based in Shanghai and chaired by Russia with India as its first rotating President. They have also created an enormous currency exchange reserve with a sizable $100 billion dollar balance. BRICS members will turn to this account to to fend off any impending balance of payment crisis, rather than surrendering to the exploitative terms of the IMF or World Bank. (For more on how these organization really operate, read “Confessions of an Economic Hit Man” by John Perkins.)
Economists surveyed by Bloomberg like to highlight how BRICS economies have slowed from a roaring 10.7% back in 2007, to a disappointing 5.4% this year. But is this simply a sour grapes reaction, or are they trying to play down the success of these ‘third world’ nations? I don’t believe that Obama would be disappointed with a 5.4% increase in the US economy right now.
Gold for Dollars:
What does this mean for gold? The BRICS alliance is based on growth and revolves around their tangible assets of gold and energy. In contrast, the US economy is the diametric opposite, based primarily on debt in the form of Treasury Bonds and a vast mountain of newly printed fiat Federal Reserve Notes that has been propping up the markets.
The International Gold Standard promising gold for dollars was dissolved by Nixon in 1971. If people lose faith in the U.S. dollar and a crisis ensues, we could see a new Gold Standard backed by the huge currency reserves of the BRICS countries. As it stands today, this new BRICS agreement doesn’t drive up the gold price as a stand-alone consequence, it is more about the beginning of what Einstein called an ‘equal and opposite force’ that is building speed, gaining weight, and certainly achieving world credibility.
Many believe this new bank will become the BRICS gold central banking system for international trade settlement. They will re-monetize gold for trade in goods, by-passing the dollar or establishing trade via other currencies. We will likely see some type of alternative to the SWIFT system used the Western banks (lately as a political tool) and the end goal is to start backing their trades and individual currencies with gold.
Death for the Dollar:
The de-dollarizaion of the global economy appears to be picking up stream, highlighting the ongoing breakdown of the western banking system. As the dollar loses strength, this provides a huge opportunity for the BRICS nations to create a more stable currency that is backed by commodities.
Up to now, there has not been a credible alternative to the Western banking establishments. While the BRICS Bank may only be a ‘mini’ world bank at its creation, these nations have definite objectives of building stability and influence within the global economy. The BRICS alliance already has a list of nations 100 strong, that are queueing up to join, or at least be recognised as associates. Their recent summit meeting in Brazil had delegations from more than 20 countries who attended. These nations sent their Presidents – not just their Financial Ministers.
Gold and Energy stores:
The BRICS members have a clear focus on tangible assets such as gold and energy, and a lack of enslavement rules and regulations offered by Western central banks. Putin is sitting on a mountain of energy that Europe cannot do without. Even Germany is doing deals with Russia to safeguard their energy supplies to protect their industrial giants. The gold it owes to Germany is just a small example of this. Gold reserves taken by the US after World War 2 and held for safe keeping is just another debt that the world knows will not or can not be re-paid.
The IMF reply to all this is to bash the gold price down the fairway with an almighty golf swing of $3.7 billion of paper gold in one big hit.
Going for Gold:
There is no doubt that this is a premium opportunity to buy gold for a long laundry list of reasons. Adding to this already long list, we believe the dollar will come under increased pressure at the world no longer sees the benefit in using it to settle trade accounts. Adding fuel to this fire, BRICS nations are now establishing a viable alternative to dealing with the IMF and World Bank, with the possibility of a new currency to rival the 100% fiat dollar that looks to be in the last day of holding the reigns as world currency reserve.