A Gold-Backed Currency? Not Yet!

With the global de-dollarisation trend continuing and seemingly gaining steam of late, is there a catalyst to speed this process? We think so, but we aren’t counting on it just yet.

We don’t believe there are events that would cause the dollar to collapse, though we do see this trend weighing on the dollar for the foreseeable future, with potential events, such as those discussed below, causing a potential acceleration of this trend. This is not to say that the USD isn’t in danger of falling significantly to other currencies (including gold); we just don’t see an outright collapse.
 

At some point, dollars that are circulating outside the U.S. (which is very significant relative to the amount of dollars circulating inside the U.S.) will find their way back home, causing inflation to spike dramatically and potentially causing the USD to lose most of its purchasing power.
 

For decades now, the U.S. has been exporting inflation, courtesy of the U.S. dollar being the reigning global reserve currency. In other words, because of the USD’s reserve currency status, most trading among large global economies is transacted via dollars (88% of international transactions conducted using the USD), artificially propping up the dollar relative to where it would otherwise be. The dollar also accounts for 58% of global foreign exchange reserves. The tide is turning as the world has found and will continue to find alternatives to the dollar. Even if the percentage of international transactions falls to 50-60% and the percentage of USD foreign exchange reserves falls to 40%, this could have massive implications for the USD. This would undoubtably cause dollars to flow back into the U.S., igniting inflationary pressures.   
 

During recent years, the de-dollarisation trend has gained steam due to a wide array of factors. While the BRICS countries have been seeking to reduce their reliance on the USD for well over a decade, the Western sanctions on Russia after its invasion of Ukraine have accelerated this process. All BRICS nations have been critical of the USD hegemony, for different reasons. The sanctions imposed on Russia disabled Russian banks from using SWIFT and froze Russia’s $330B in reserves last year. The U.S. weaponising the dollar should put every country on notice that the U.S. cannot be trusted.
 

Over the past year or so, Russia, China, and Brazil have been increasingly turned to non-dollar currencies in their cross-border transactions. In 2022, Brazil reinstated Luiz Inacio Lula da Silva as President. He has long been a proponent of BRICS and sought to reduce Brazil’s dependence on and vulnerability to the USD. He re-energized the group’s commitment to de-dollarization and spoke about creating a new euro-like currency (only sound). We all know China’s position, as it has clearly laid out its concerns, calling it “the main source of instability and uncertainty in the world economy.”
 

It has become increasingly clear that the U.S. dollar’s days as the world reserve currency are coming to an end. This may have been prevented or delayed for several more decades if the U.S. hadn’t abused this privilege to the degree it has. But while many believe a new reserve currency could supplant the U.S. dollar as the reserve currency, we don’t subscribe to this viewpoint. In our thinking, it would make more sense for countries to trade with each other in their local currencies, which would be made far easier if such currencies were backed or partially backed by gold or other commodities.
 

While we believe the on-going de-dollarization trend could potentially continue for perhaps a decade, we also see various potential catalysts that could accelerate this trend. This could be in the form of using other fiat currencies for trade (which has already started happening) but the biggest catalyst would come in the form of a USD alternative, especially a sound currency backed by a real asset.
 

THE FINAL NAIL IN THE COFFIN OF THE USD?

The planning for an alternative to the USD dates back, as far we can tell, to 2006, with the creation of the New Development Bank. This sounds exactly like the World Bank, just in Asia. A few months ago, the Prime Minister of Malaysia met with Xi Jinping in Beijing and suggested the creation of an Asian Monetary Fund, as a regional version of the IMF. Instead of an SDR, like the IMF, it would be a basket of currencies (which will be at least partly backed by gold as discussed below). In other words, all of this has been in the works for close to two decades. In 2010, the BRICS Interbank Cooperation Mechanism was launched to facilitate cross-border payments between BRICS banks in local currencies. More recently, BRICS nations have been developing “BRICS pay”—a payment system from transactions among the BRICS without having to convert local currencies into dollars.
 

The new monetary system sounds like the antithesis of the USD, meaning it is backed (in part) by real assets—gold in this case (silver mentioned as well). Note: This won’t be a new global or eastern world reserve currency, rather BRIC countries will trade using local currencies backed by gold and other assets. Select BRIC countries’ representatives reportedly announced they would be unveiling what is basically a new gold-backed monetary system, with the official headline being: “Potential Gold-Backed Currency To Be Launched at the BRICS Meeting in August.” We believe these headlines are misleading as Anil Sooklal, South Africa’s Ambassador at Large, commented: “There’s never been talk of BRICS currency, it’s not on the agenda. While we know there has been discussion of a BRICS monetary system, we are skeptical if it’s even on the upcoming Agenda for the summit in August.
If we are wrong, we view any comments on this new monetary system at the upcoming summit as positive for gold and negative for the USD.”
 

While we think a BRICS monetary system will develop, it will likely take more time to get there, and ideally, we’ll hear something more concrete within the next three to five years. There are still a lot of potential logistical issues that would need to be worked out. However, when we start to get indications of a roadmap/timeline, it should heavily weigh on the USD, and in the meantime, the de-dollarization trend will continue.
 

The U.S. is pushing other nations toward a sound currency that isn’t dominated by a single country. When the U.S. decided to lock out Russia from the SWIFT banking system to prevent Moscow from using the dollar for trade, it created new motivations for countries to join BRICS. No fewer than 20 countries have formally applied to join, which will be discussed at the event in August.
 

This comes with a caveat in our view, which means the gold backing must be convertible. If this is not the case, we think the trust issue alone would be a drag on adoption.
 

In summary, the dollar’s de-dollarization trend is accelerating, and will accelerate over the coming years. This will happen regardless of whether the BRICS countries launch an asset-backed monetary system/basket of local currencies backed by gold and other assets. This bodes well for all real assets but is especially bullish for gold and silver.
 

THE MAD RUSH FOR PRECIOUS METALS

Regardless of the BRICS influence the run to gold has begun as I have stated numerous times in my recent interviews/podcasts. The Bankers know gold is their ultimate money to restart the system if their CBDC fails. Gold purchases by Central Banks are setting records. This is a warmup to The Great Gold and Silver Rush of the 21st Century.
 

Silver is the most undervalued precious metal and even the mainstream is admitting a “shortage” in the future. The solar industry alone will use almost 500 million ounces of silver by 2025. This is better than half of total silver production and recycling in a year. Going out further to 2030, total silver use by industry alone nearly takes ALL silver available. This is forward looking and based on current trends, but it does present the case for a natural “corner” on the market, where industry corners the silver market, not the Hunt’s or some hedge fund. Something to think about if you are inclined to leave a legacy to your family.
 

The currency crisis is here as outlined in the beginning of this article. Alternatives to the U.S. dollar dominance are not only the BRICS but the entire crypto currency movement. All Fiat Fails - Remember that because your financial well being depends upon that knowledge.
 

Finally, at The Morgan Report we specialise in the equity side of the resource sector and the current climate is the best in a century. This means the price of the mining stocks versus the metal itself has never been greater than now. Our track record is one of the best in the industry and our next issue (September) proves our model portfolio is out performing already.   EG