by Jim Rickards, Daily Reckoning:
I recently revealed that the so-called “BRICS+” countries will announce the creation of a new currency at its annual leaders’ summit conference on August 22–24.
This will be the biggest upheaval in international finance since 1971. It’s taking direct aim at the dollar.
Quite simply, the world is unprepared for this geopolitical shock wave.
It appears likely that the new BRICS+ currency will be linked to a weight of gold. This plays to the strengths of BRICS members Russia and China. These countries are the two largest gold producers in the world, and are ranked sixth and seventh respectively among the 100 nations with gold reserves.
One difficulty in considering the impact of the new BRICS currency on the dollar is that all dollar indexes compare currency to currency. But that’s meaningless since the dollar, euro and sterling could all suffer from a loss of confidence at the same time.
If gold goes from $2,000 to $10,000 per ounce, that is better understood as an 80% devaluation of the dollar: from 0.0005 ounces per dollar to 0.0001 ounces per dollar. That’s a collapse of confidence but you’ll miss it if you’re looking at euros or yen.
Those currencies will all be collapsing at the same time.
The Only Way to Measure the Dollar
The only objective metric for dollar strength is the dollar price of gold by weight since gold is not a central bank currency. This resolves any valuation conundrum as follows:
1. Dollar strength can only properly be measured in gold.
2. Gold is money but it is also a commodity.
3. BRICS are dollar poor but commodity rich.
4. A new BRICS+ currency will be linked to gold.
So the collapse of the dollar really means higher inflation and a much higher dollar price for gold. That means other commodity prices will rise in lockstep. A commodity boom favors BRICS generally speaking.
This dynamic could lead the BRICS+ currency to displace the dollar as a dominant payment currency more quickly than most expect because of the link to gold.
Except for direct participants, the world has mostly ignored this prospect. The result will be a shock to the international monetary system coming in a matter of weeks.
Still, the impact on investors won’t end when the new BRICS+ currency is rolled out. The market implications will roil exchange rates and capital markets for years to come. Most people still have no idea how to even approach the subject.
Isn’t Gold Too Volatile to Support a Currency?
After I introduced this subject earlier this month, I received a reader question that I think needs to be addressed:
Jim, since the gold price is really a function of the paper gold market and is therefore subject to manipulation – and significant volatility – wouldn’t a gold-backed.currency require that gold be fixed at a certain price, such as it was fixed at $20.67 under the classic gold standard?
Otherwise, it would lack the stability a currency requires, even a gold-backed currency. Again, the paper market subjects gold to manipulation.
The U.S. obviously doesn’t want a rival currency bloc, especially one led by Russia and China, and would have every motivation to sabotage it.
The U.S., in conjunction with the big banks, could create all kinds of havoc in the paper market to undercut gold prices.
There really can’t be two parallel gold markets, one fixed at a certain price that BRICS recognizes and the other one fluctuating constantly.
In other words, can a trading bloc really adopt a gold-backed currency in the absence of an updated version of the classic gold standard with a fixed price?
Otherwise the volatility introduced by the paper market would render the underlying commodity unsuitable as a currency, which is meant to be stable. Or so it seems to me.
Am I missing something here?
It’s a good question, and that reader is months ahead of the rest of the world in figuring this out.
Gold Manipulation Is Real
The reader is correct that gold prices are manipulated. There is hard statistical evidence to make the case, in addition to anecdotal evidence and forensic evidence. The evidence is very clear, in fact.
I spoke to a Ph.D. statistician who works for one of the biggest hedge funds in the world. I can’t mention the fund’s name but it’s a household name. You’ve probably heard of it. He looked at Comex (the primary market for gold) opening prices and Comex closing prices for a 10-year period.
He was dumbfounded. He said it was the most blatant case of manipulation he’d ever seen. He said if you went into the aftermarket, bought after the close and sold before the opening every day, you would make risk-free profits.
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