What are the BRICS nations
The BRICS nations of Brazil, Russia, India, China, and South Africa are suddenly garnering headlines as President-Elect Trump has threatened to impose 100% tariffs on the bloc of associated countries. But who are the BRICS nations? The intergovernmental organization currently consists of nine countries with Iran, Egypt, Ethiopia, and the United Arab Emirates rounding out the member list.
These nations represent some of the world’s fastest growing economies, and they are actively challenging the global world order which is currently dominated by the West. Their coalition seeks to advance the interest of emerging economies, secure greater representation on the world stage, encourage multilateral trade cooperation, and facilitate less dependence on the U.S. dollar.
According to The United States Institute of Peace:
“The dollar’s dominance as a reserve currency and in trade for commodities like oil gives Washington immense influence over the global financial system. Countries impacted by U.S. sanctions and export controls — like BRICS leaders Russia and China, new members like Iran and wannabes like Venezuela — want to weaken the dollar’s power in order to evade sanctions and tamp down U.S. influence.”1https://www.usip.org/publications/2024/10/whats-driving-bigger-BRICS-and-what-does-it-mean-us
Reducing the dollar’s dominance is called “de-dollarization,” and it would dramatically shift the current balance of economic power away from the United States.
De-Dollarization and a Global Power Shift
The BRICS alliance, which was created by Russia back in 2009, is gaining influence. According to Reuters, the bloc accounts for over 40% of the world’s population and a quarter of the global economy.
And some 40 additional countries have expressed interest in joining the group of nations including Egypt, Bolivia, Cuba, Ethiopia, Democratic Republic of Congo, Gabon, and Kazakhstan.2https://www.reuters.com/world/what-is-BRICS-who-are-its-members-2023-08-21
Unfortunately for the U.S, members of the coalition are united in their desire to create a new currency as well as a new block-chain payment system to directly compete with the dollar. Their attempt to move away from the greenback has far-reaching repercussions for the American economy and everyday investors since it could depreciate U.S. financial assets, create a wave of investment uncertainty, and profoundly rattle Wall Street.
One former White House economist called it “an economic wrecking ball”3https://finance.yahoo.com/news/BRICS-countries-could-swing-economic-040218147.html while Alexander Wise, of JP Morgan Strategic Research suggested equally profound implications.
“For U.S. equities, outright and relative returns would be negatively impacted by divestment or reallocation away from U.S. markets and a severe loss in confidence. There would also likely be upward pressure on real yields due to the partial divestment of U.S. fixed income by investors, or the diversification or reduction of international reserve allocations.”4https://www.jpmorgan.com/insights/global-research/currencies/de-dollarization
Suffice to say, “de-dollarization” is a dirty word in U.S. financial circles as the end of dollar dominance would be catastrophic to both American economic and political power. Currently, the dollar is the world’s reserve currency which not only allows the U.S. to freely borrow money but to also impose crippling financial sanctions to secure more favorable foreign policy agreements.
Trump and Tariffs
Much like economic sanctions, tariffs can also be used in global deal making and to secure more beneficial foreign and monetary policy outcomes. President-elect Trump recently threatened to impose 100% tariffs on the BRICS bloc of nations in response to their attempts to undermine the dollar.
Trump posted the following on Truth Social:
“The idea that the BRICS Countries are trying to move away from the Dollar while we stand by and watch is OVER. We require a commitment from these Countries that they will neither create a new BRICS Currency, nor back any other Currency to replace the mighty U.S. Dollar or, they will face 100% Tariffs, and should expect to say goodbye to selling into the wonderful U.S. Economy.”5https://www.businessinsider.com/dedollarization-trump-BRICS-tariff-threat-may-backfire-us-dollar-deficit-2024-12
Despite Trump’s warning, the U.S. dollar’s dominance is already fading. According to independent think tank the Official Monetary and Financial Institutions Forum (OMFIF), the dollar’s share of global currency reserves has fallen 10% over the last 20 years. Currently at 60%, it is on track to plummet to 40-45% by 2050.
“The gradual fall, alongside an increase in the importance of the euro and the renminbi, is seen as a natural consequence of the gradual reduction in America’s relative importance in the world economy. Factors that could speed up the fall include more aggressive action by emerging market economies to promote the use of non-dollar currencies as well as persistent US budget and current account deficits.”6https://www.omfif.org/2024/10/how-gradual-decline-in-dollar-dominance-could-quicken
While the dollar’s supremacy has been challenged before, “this time it’s different” according to economist, Yuefen Li, who explains that disgruntlement with the dollar is more widespread and new de-dollarization efforts are more pronounced, increasingly multi-faceted, and have become part of the economic policy and political strategy in some countries.7https://internationalbanker.com/finance/the-dollar-still-dominates-but-de-dollarization-is-unstoppable
Why the Rush to Gold will Continue
If the dollar loses its position of global dominance, the impact on the American economy will be pronounced including currency devaluation, inflation, higher borrowing costs, and a dramatic depreciation of dollar-based financial assets. This will likely drive investors to what the International Monetary Fund calls “politically neutral” gold.8https://www.businessinsider.com/dedollarization-china-allied-central-banks-hoard-gold-dollar-weaponization-record-2024-5
Gold has been on a record-setting run this year, mostly fueled by central bank demand for its safety, stability and store of value — particularly in the face of regional wars, political volatility, monetary policy shifts, and now the threat of tariffs and increasing risks to the dollar.
Famed economist and businessman, Mohamed El-Erian touts gold’s recent departure from traditional price triggers and suggests that it has now emerged as a viable alternative to a dollar-based financial system.
“Something strange has happened to the price of gold over the past year. In setting one record level after the other, it seems to have decoupled from its traditional historical influencers, such as interest rates, inflation, and the dollar. Moreover, the consistency of its rise stands in contrast to fluctuations in pivotal geopolitical situations. Gold’s “all-weather” characteristic signals something that goes beyond economics, politics, and higher-frequency geopolitical developments. It captures an increasingly persistent behavioural trend among China and “middle power” countries, as well as others. And it is a trend that the west should be paying greater attention to.”9https://www.ft.com/content/b5fb1e6b-bb8d-4ab5-9c92-f1f6fc40a54b
Investors should pay particular attention. If we are indeed witnessing a dramatic shift in the monetary world order, gold may experience a moment not seen in generations — since the U.S. became the de facto global reserve currency in the aftermath of WW II.
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1 https://www.usip.org/publications/2024/10/whats-driving-bigger-BRICS-and-what-does-it-mean-us
2 https://www.reuters.com/world/what-is-BRICS-who-are-its-members-2023-08-21
3 https://finance.yahoo.com/news/BRICS-countries-could-swing-economic-040218147.html
4 https://www.jpmorgan.com/insights/global-research/currencies/de-dollarization
6 https://www.omfif.org/2024/10/how-gradual-decline-in-dollar-dominance-could-quicken
9 https://www.ft.com/content/b5fb1e6b-bb8d-4ab5-9c92-f1f6fc40a54b
