Follow The Yellow BRICS Road (part 3)
Follow The Yellow BRICS Road (part 3)
Weaponizing Gold And Trade Deficits
OPEC Embargo And Its Limits
To understand how commodities can be weaponized, we need to look no further than the 1970s and OPEC. Highly displeased by the West's support of Israel, Arab nations decided to limit oil exports to the West and "unfriendly" nations.
Repeating this process could be enough in itself. If all the BRICS and associated countries would hold on to raw materials, as well as food, steel, chemicals, fertilizers etc… Western economies would suffer greatly.
The problem is that we also know what happened in response to the OPEC gambit.
The West suffered, but ultimately so did the Arab countries.
It highly rewarded energy producers NOT part of OPEC, free to make tons of money and to seize market shares.
This is a classical prisoner dilemma problem, where breaking rank first is highly beneficial. So holding such a coalition together is hard in the long term. Even worse if not everyone is on board from the beginning.
It also encourages Western countries to solve their deficiencies. France (and the US) built nuclear power plants massively. Oil production from the US and the North Sea went into overdrive.
OPEC's victory was a Pyrrhic one. If kept long enough, the embargo would have made Middle East oil completely irrelevant.
Asking For A Fair Price
Another option is to ask for a “fair” price. The core of the shared hostility to the dollar system is how unfair it is to non-Western countries. If they could become richer from commodities sales, they might ignore wokeism, Chinese influence, and so on.
So a simple thing is just to refuse to give away real things for paper. This would move international trade settlement from a currency system (exchanging goods for money) to a barter system (exchanging goods for goods).
This way, you cannot anymore have the West/USA giving you printed dollars for your labor and sacred resources. Oil versus chips. Iron for airplanes. Beef for oil rigs, etc…
An Unstably Balanced Basket
For a while, this was apparently the intended direction of the BRICS currency. It was supposed to be based on a “basket of commodities”.
We can imagine it was supposed to reflect the BRICS economies. A "bric" coin would have been something like 15% oil, 10% grain, 5% beef, 20% gas, etc…
The first issue is obviously that each party would try to push for HIS commodity to be over-weighted in the final basket.
The second issue is that commodities are notoriously going through cycles of boom and bust. A barrel of oil might be worth 3 bushels of grain one day, but 7 bushels a year later.
If negotiating the initial balancing was a diplomat's nightmare and a dead end, imagine repeating this process several times per year…
In any case, China is okay to trade these commodities for its manufactured goods and infrastructure investments, being the largest trade partner of the entire non-Western world. As long as it sells more than it buys, it will not suffer from it. So this is more of an issue of getting everyone else happy with the new system.
Barter Disorder
Ironically, it seems humans never learn. The complexity of multi-goods trading is what makes a barter economy not scalable. You might have a cow to sell, but the potential buyer only has beans. But you wanted a sword for that cow. And the sword seller does not want beans but iron ore and coal.
This is why any economy evolving beyond the stone age and subsistence economy invented a currency.
This allows market forces to determine the price of things and makes exchanges smoother.
Short-sighted individuals and institutions claim this is why the dollar is impossible to dethrone. A currency will always rule, and the dollar is king of them all.
But what is needed is a widely accepted currency or commodity, not dollars specifically.
Basket vs Coins
The key characteristics of a good currency are to be impossible to fake, hard to produce, and easy to exchange.
Over time, gold and/or silver usually took this role.
Paradoxically, the relative uselessness of these metals made them a perfect currency. Removing iron or grain from the economy to store it could be devastating. But gold suffered not such limitation. It was nevertheless rare, very hard to produce, and easy to trade with. The fact that it does not tarnish or damage over time was an extra bonus.
As a side note, this also might mean that silver, now a VERY useful industrial metal, might never make a good monetary metal ever again. Make of that what you will.
For the same reason ancient Egyptians and Sumerians needed a currency, the BRICS need a common physical metric by which to measure each of their production, from oil barrels to soybean bags to SMIC computer chips and Sukhoi fighter jets.
And the conclusion is the same as every other hundred of times in history the question arose to pick a solid currency that every party could trust to be rare, precious, hard to produce and easy to test.
A golden barbarous relic.
A ”useless” yellow brick (BRICS?).
Proof Of This Direction
Culture
The first element is simply that for most cultures of the BRICS, gold never stopped being a currency. Chinese citizens store their wealth in gold. So do even more Indians. And South Africans. And Brazilians or even worse, Argentinians, surely have no trust in their own paper currency, and for good reason.
So really, the discussion should be more about why the BRICS would not consider gold as a currency. As they never stopped to do so.
Logic
I already explained the reasoning. A basket of commodities would be even more disagreement causing than the SDR “basket of currency”. But a purely fiat currency could never work either.
To replace the dollar, something better needs to be offered.
Another fiat currency does not cut it, or the rouble and even more the yuan would have already done so. Trusting Beijing is certainly not more appealing than trusting Washington and London.
So by relying on gold as the new basis of exchange, you can handle the low trust between the BRICS countries. While still moving away from dollars that can be seized in an instant.
Diplomatic Positioning
This is a little more contentious, as there are a lot of conflicting signals.
Russian media are pushing hard this narrative of a new BRICS currency anytime now, for obvious reasons. Same for Iranian sources. Overall, this is more war propaganda than reality, and a pretty crude one, as explained very well in this article from the Gold Observer:
Chinese media is also harshly criticizing the dollar, but makes it clear this is still a work in progress.
India is apparently not interested, and probably the biggest obstacle to any formal agreement from the BRICS. How this could still happen if India sits it out, we will discuss later in part 4. Interestingly, India is happy to turn to local currency for regional trades, like India-Indonesia.
Newly entered players are Arab countries. It seems the Saudis are keen to run away from the dollar ASAP, probably because they have been regularly threatened by Americans since the Trump presidency. And took a major step away by normalizing relations with Iran, under China's hospices.
Dubai could be a perfect "neutral ground" for a trade clearing house between banks using the brics coin. Military impotent, but a pre-existing global trade hub and finance center, culturally non-western and becoming the center of Islamic finance, which bans usury, and already a large gold trading hub looking to rival Switzerland.
Actions
Central banks all over the world, but especially in the BRICS and the Global South have been net buyers of gold. Chinese and Russian gold miners’ production essentially never leaves the country.
Why would they so actively and stealthily accumulate gold?
No one knows how much gold is stored in the BRICS countries, especially China, with estimates ranging from 3,000 to 25,000 tons. With the personal holdings of citizens, it could be possible that (way more than?) half of the world's gold has already moved out of the West.
I am a firm believer that in the long run, the BRICS countries will go back to a form of gold standard for international trade. Simply because it gives them more power and weakens the West. So why should they not do it?
For a while, the reason was "the time has not yet come". With Russia and increasingly China, butting heads with the USA, the time seems to have come. In the same way time has come for the Saudis to look for a new sponsor and protector.
The last part to be published soon will detail the plumbing and method by which such results can be achieved. And its chances of success.