Another BRIC in the Wall | BRICS Summit & Currency Update

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Another BRIC in the Wall | BRICS Summit & Currency Update

September 5, 2023 478 view(s)

As the 2023 BRICS Summit came to a close last week, we learned that six more nations would be admitted to “BRICS+,” with invitations to 60 more nations awaiting consideration.  Amazingly, arch-rivals Saudi Arabia and Iran are two of the six.  The others include Egypt, Argentina, the UAE, and Ethiopia.  Saudi Arabia's willingness to trade oil for something other than dollars likely indicates that the end to the petrodollar trading scheme cannot be far behind.  As you may recall, the “petrodollar” was developed in the mid-1970s as a way to provide support for the dollar after the Nixon Shock removed the link to gold.  All nations of the world were required to buy and sell petroleum products using dollars, thus helping to provide support for the World Reserve Currency (dollar).  The breakdown of the petrodollar system may portend the end of World Reserve Currency status for the dollar.

 

BRICS Currency Not Necessary

While there was no formal announcement at the BRICS Summit of a trading currency backed by gold, there are indications that non-dollar transactions are becoming an increasing portion of world trade.  Iran and China are discussing a $2.7 billion airport construction project to be completed in Iran by Chinese companies.  The project is expected to be paid for with Iranian oil.  So, an airport and oil are being used to trade with, outside the realm of the dollar.  Saudi Arabia is also in discussions with China to produce a nuclear power plant in Saudi Arabia, with the terms to be decided.  Saudi Arabia has indicated an interest in building up to 16 nuclear plants worth $80 billion.  They are also considering Russian proposals as well.  There is another $2.2 billion project on the table between South Africa and China related to infrastructure, tourism, and education in South Africa as an extension of the Belt & Road Initiative.

 

How much of an impact can an expanding BRICS make for the average American?  For as long as most Americans can remember, world trade has centered around the dollar.  Since the dollar is our currency, the world has been our oyster, so to speak.  Goods and services from anywhere around the world could be purchased with dollars.  In many cases, only dollars could be used.  That has been great for us, as dollars are only created here in the United States.  But the dollar became dangerous to hold, with the sanctioning power of the United States being used too often in recent years.  Nations began to look for ways to go around using the dollar, in part to protect their economies and citizens from dollar sanctions.  The US Government has been able to fund repeated budget deficits because of continual worldwide demand for dollars.   This privilege is now beginning to dry up.

 

BRICS+ nations now control 43% of the world GDP, vs. 30% for the Western G7 nations.  If you average out the commodities graph below, BRICS+ will also control approximately half of commodities produced and traded worldwide and roughly 50-80% of oil production.  Most of these goods used to be purchased with dollars, even when foreign nations were doing the buying and selling.  A BRICS+ trading block means that the inventory of goods available for purchase with dollars could be halved in the months ahead.  This could become more pronounced as the remaining 60 invited nations choose to join.  If nations don’t want to receive dollars for their goods, raw materials, or commodities, they now have alternative markets available.  If they choose to accept dollars in trade, they will be able to demand higher prices in dollar terms - which will impact every American.

 

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Risk of Bad Debts

One of the most dangerous aspects of the BRICS+ coalition is not a new currency to compete with the dollar.  The capacity for such a currency does not currently exist in and among the member nations.  Something to keep an eye on is whether or not the BRICS+ coalition leadership continues to promote and encourage the idea that nations can join BRICS and start fresh financially without regard to their old dollar-based or Western-backed debts.  This is perhaps one of the least-talked-about dangers to the average American.  What would happen to the retirement and investment accounts of Americans holding securities that derive their value on incoming payments from overseas if those incoming payments were to cease?  There’s an old saying if you owe the banker $1,000 and cannot pay, you have a problem.  But if you owe the banker $1,000,000,000 and cannot pay, he or she has a problem.

 

The United States has served as the banker in the above scenario, loaning out $ billions to international partners, including those who have expressed an interest in joining BRICS.  This has been done directly through American entities such as USAID and indirectly through the World Bank and IMF.  If these debts were to go into default, it could wreak havoc on the American investing public, or worse yet, lead to some type of international conflict. It would behoove us as Americans to begin to realize that our paper currency and other paper investments are no longer as safe as they once were and begin to protect our financial futures by owning precious metals.

 

Precious metals do not depend on someone else paying us back.  The value of precious metals is inherent in the metals themselves.  The costs for energy (oil, electricity, etc.) helps build a floor under precious metals prices, and oil is rising in price.  Some analysts are predicting $300/barrel oil within a couple of years.  The growth of BRICS+ is certainly partly to blame for the expectation of higher oil, along with domestic policies that favor alternative energy development over petroleum.  As with the stagflationary period of the mid-1970s, higher energy prices can wreak havoc with stocks but can be great for precious metals.  Mining and refining are energy-intensive operations, with labor being another cost driving the metals higher.

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Precious Metals Opportunity

Gold has averaged 8%/year over the last 50+ years but only 4% for the last ten years.  This suggests that gold is due a decade of 12+% performance to get back to average levels.   Since a year ago, gold is up 13%, which is in the range we would expect for the next 10 years.  Silver is up 35% from a year ago, but is only half of it’s previous high, with plenty of room for increase.  Platinum spent several years priced higher than gold but is currently priced less than half.  It increased 16% since a year ago and has started a journey to catch up to gold.  Palladium is down 40% since a year ago and offers a great entry point to this rare metal (80% produced in BRICS+ nations).  Palladium is up 7200% since 1982 and is a proven performer.  Owning any of these metals would be prudent, in light of the major changes impacting the financial world as we know it.