BRICs Hoarding Gold or Playing Catch-up?
Gold is the original money, and it has been the foundation of monetary systems since Ancient Rome. However, in the West, gold has been rapidly losing its importance as the world now runs on the dollar standard. Among the brick nations, (Brazil, Russia, India, and China) evidence suggests gold is making a comeback. For example, the Central Bank of Russia bought 1.4 million ounces of gold in October; this translates to an additional 48 tones to its total stockpile and represents 1.5 percent of all newly mined gold for the year.
Russia’s October gold buying spree is part of a larger trend that may have significant economic and geopolitical implications. However, this data must be analyzed in perspective to get a fuller understanding of what is actually going on.
The Geopolitics of Gold
Gold is the perfect monetary asset because of its scarcity, fungibility, and durability; that is why the metal has been used as money for most of human history. However, for all extents and purposes, the U.S dollar has replaced gold as the global reserve currency. Nations hold U.S dollars in reserve to back up their currencies.
Before 1971, gold backed the dollar, and by extension the global monetary system. Now the dollar floats freely, backed by nothing but the word and power of the U.S government. For many, especially nations competing with the U.S for power and influence, this situation may be bothersome. In addition, global reserve currency status has never lasted forever.
The only form of money that has ever been able to keep its value for over two centuries is gold.
So, are Russia and China hording gold and taking control of the world’s real wealth by betting on a spectacular dollar collapse that will leave the rest of the world destitute? At first glance this would certainly seem to be the case; however, when looking more closely at the data, a different picture emerges.
The Dollar is Still backed by Gold
When we look at global gold reserves, China, India and Russia are below what would be expected - considering the vast amounts of the metal these nations buy every month.
China, the world’s second biggest economy, has only 1054.1 tons of gold, less than half the reserves of Italy, France and Germany. Italy, a country that has largely faded from geopolitical relevance, has double the gold reserves of Russia despite having a similar GDP. However, even the gold wealth of western Europe pales in comparison to the vast reserves of the United States. This one nation holds 8133.5 tones of gold – more than all the brick nations combined twice over.
This chart shows us a simple fact: even through the U.S dollar is not explicitly backed by gold it is still backed by gold implicitly. The rapid gold purchases from China, Russia, and India are simply an attempt to catch-up. These nations seek to amass gold reserves commensurate to their new-found power and geopolitical influence, but they are still small players in the global gold market.