Is a New
BRICS Currency Coming in Late August?
By Victor Sperandeo with the Curmudgeon
The BRICS Summit in Johannesburg, South Africa from August 22-24th may be a potential game changer for trade, currencies, and the precious metal markets. BRICS [1.] heads of state have said they will discuss Russias invasion of Ukraine, peace in Europe, the humanitarian crisis, health, education, and climate change. However, theres increasing speculation that a new BRICS currency will be considered.
Note 1. South Africa is the current chair of the BRICS, a group of countries that includes Brazil, Russia, India, and China whose aim is to challenge US and European global dominance.
South African President Cyril Ramaphosa said that next month's BRICS summit would be held in person for the first time in three years. "We have not held a physical summit for... almost three years. It's not going to be virtual," he stressed.
Vladimir Putin has been invited to attend, despite an arrest
warrant on the Russian leader. The
warrant holds South Africa responsible for arresting Putin if he travels to the
BRICS Summit. Ramaphosa informed Putin
during their phone conversation on Saturday July 15th about
preparations for the BRICS summit, the Kremlin press office reported. However, theres no word on whether Putin
will attend or not.
File photo of South Africa's President Cyril Ramaphosa, India's Prime Minister Narendra Modi, China's President Xi Jinping, Russia's President Vladimir Putin and Brazil's Jair Bolsonaro taken at a BRICS Summit on November 14, 2019, in Brazil.
Photo credit: Sergio Lima, AFP
Background and Analysis:
Recently, the BRICS nations have been pursuing a wide range of initiatives to decrease their dependence on the U.S. dollar. Over the past year, Russia, China, and Brazil have turned to greater use of non-dollar currencies in their cross-border transactions. Iraq, Saudi Arabia, and the United Arab Emirates are actively exploring dollar alternatives. Many central banks have sought to shift more of their currency reserves away from the U.S. dollar and into gold.
While talk of a BRICS currency has gained momentum, there is limited information on various models under consideration. Indeed, a new BRICS currency would be an important indicator of the desire of many nations to diversify away from the dollar.
Bloomberg reported on June 1st that BRICS nations asked the blocs specially created bank to provide guidance on a how a potential new shared currency might work, including how it could shield other member countries from the impact of sanctions such as those imposed on Russia. Proposals are being considered by officials at the New Development Bank, the Shanghai-based lender created by BRICS nations, and the bloc will be guided to them as to what the future models might be, Naledi Pandor, South Africas minister of international relations, told reporters at a meeting.
RT, the Russian state TV news outlet (banned in the U.S. and Europe), tweeted a short video on July 6th titled, BRICS plans to introduce new gold-backed currency. However, there was no official government confirmation of that by any of the BRICS nations, including Russia.
The details to be discussed at the BRICS Summit are secret, but speculation is that the proposed new BRICS currency will be a payment system for TRADE, between nations. It will be backed by gold, but NOT convertible into gold.
The hypothetical new BRICS currency will NOT replace the U.S. dollar as the worlds Reserve Currency, but it would surely cause the U.S. dollar to decline on foreign exchange markets.
In my opinion, Gold-backed implies a limit to the expansion of a newly proposed BRICS fiat currency with some designated percentage of gold needed to expand the currency.
If the new currency were to be convertible into gold, the price of the yellow metal could be at $2,300/ounce and rising.
The key economic question is whether Saudi Arabia and OPEC+ (which includes Russia), accept the BRICS currency as payment for oil. That would end the petrodollar monopoly thats been in place since 1974.
If the new BRICS currency is accepted by OPEC+, the U.S. dollar could rapidly decline 20% to 30%. That, in turn would propel U.S. import prices significantly higher which would increase inflation.
My estimates project the CPI to increase at 4% -to- 5% annually over the next 10 years, as a decline in the dollar from the BRICS currency competition will cause prices of global products to rise in the U.S.
Side Note: The trend of U.S. consumer prices (CPI) from January 1971 to June 2023 (52.5 years) was +3.96%. Anomalies during the Obama Administration caused the CPI to rise only +1.62% from 2008-2017 (the lowest since +1.57% from 1955-1964).
Naturally this scenario will also have a dramatic impact on gold and silver prices which would increase due to the decline of the U.S. dollar.
Silver Market Suggests Something Big is Coming:
On June 30th, Rafi Farber, CEO of Arcadia Economics posted a You Tube video titled, Silver Open Interest Collapses by Whopping 20% in a Week. A decline of 20% is a record for a single week. Farber said, Nearly 30,000 silver futures contracts have closed out since June 22 (the past week). That's 1 out of every 5 contracts, and that most likely means a major trend change is imminent. Longs are bowing out, shorts are covering, and we are now below 120,000 contracts (114,042 contracts as of June 30th), right near a 10-year low. The bottom may not be in exactly, but the amount of runway once the bottom is in, is very long.
When longs and shorts liquidate their positions and get flat, open interest declines. Speculators take their chips off the table and move to a safe position.
However, silver has rallied ~11.7% since June 23rd, while open interest on CME futures has risen significantly to 142,427 contracts as of July 14th. Thats despite CPI and PPI coming in lower than forecast last week. The increase in silver prices and open interest could very well be due to anticipation of a new BRICS currency announcement in late August.
Source: CME Group
A new BRICS currency is something to closely follow as it is a potentially explosive market moving event.
Residents of many BRICS countries, like India and China, hoard gold as money because it preserves their wealth. It remains to be seen if they will accept a BRICS currency as a store of value.
Most precious metals enthusiasts (including me) are hoping for a gold backed, convertible BRICS currency. Forget that! Making a BRICS currency look like it is gold-backed is a mirage.
A mirage is an illusion of what we need projected onto the landscape of our lives. And if our lives are filled with mirages, they are in fact filled with nothing. Craig D. Lounsbrough
Be well, stay safe, good luck and till next time .
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Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.
Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies, and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.
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