The West, BRICS and De-Dollarization - Why gold could stay a highly sought-after commodity in the future.
In recent years, there have been significant changes in financial policy that are also reflected in the gold price. This has reached new highs in euros and dollars, but this development is not solely due to the Russia-Ukraine conflict. The BRICS states and the so-called "de-dollarization" also play a significant role. Behind this lies a global shift from a unipolar world order under the dominance of the US dollar to a multipolar global economy.
The rise of the US dollar can be traced back to an agreement in the 1970s between the USA and Saudi Arabia (SA). SA committed to processing oil sales only in US dollars and investing surplus revenues in US government bonds. This laid the foundation for the petrodollar system, which created high demand for US dollars as all countries that wanted to buy oil had to exchange their own currencies into dollars. This agreement gave the US enormous financial advantages. Not only were they able to acquire energy virtually free of charge by printing dollars, but they also had the ability to control other states through the SWIFT financial system. Anyone who opposed the US could be punished by economic sanctions, such as freezing assets.
This concentration of power led many countries to seek an alternative to the dollar. But the transition away from the dollar is difficult, as a new trading currency would have to be created that is liquid and widely used. This is a lengthy and costly process. Nevertheless, countries like China and Russia are pushing for an alternative system that is not based on the dominance of a single currency.
One reason for these efforts is the growing instability of the US dollar. The US is struggling with massive national debt, currently at around $35.6 trillion. Interest on this debt amounts to $1.1 trillion per year, surpassing the US military budget of $980 billion as the largest expenditure item. The dollar has lost over 80% of its purchasing power since the abolition of the gold standard in 1971, further weakening confidence in the currency. For many countries, dependence on the dollar also means dependence on the interest rates of the US Federal Reserve. If the Fed raises interest rates, capital flows out of emerging markets, which has often led to economic crises there.
June 9, 2024 marks an important date as the petrodollar agreement between the US and Saudi Arabia expired after 50 years on that day. SA stated that in the future it would be prepared to sell oil in other currencies such as the Chinese yuan or Indian rupees. This decision could mark the beginning of a new era in global trade in which the US dollar loses its dominance.
Many emerging countries in the Global South are increasingly turning towards China, which is already the most important trading partner for some of them. The Chinese yuan is gaining increasing importance as a reserve currency. A significant proportion of trade with China is already being conducted in yuan. While the distribution in 2010 was still 0.3% yuan and 84% dollars, in 2024 about 53% of China's trade volume was handled in yuan, while the US dollar has fallen to 43%. A milestone in this development was an oil deal between China and the United Arab Emirates (UAE), which was settled in yuan for the first time instead of dollars.
At the same time, the BRICS states - Brazil, Russia, India, China and South Africa - are working to create a multipolar financial system. Founded in 2006, this association now represents almost half the world's population and a third of global economic output. In August 2023, the BRICS decided to admit six more countries, including Egypt and the UAE, to their ranks. This expanded network is referred to as BRICS+.
The goal of BRICS+ is not to create an anti-West alliance, but an alternative economic system that is less dependent on the US dollar. One example is the New Development Bank (NDB), which serves as an alternative to the World Bank. Another important instrument is the Contingent Reserve Arrangement (CRA), a currency reserve system that helps BRICS countries manage currency crises and promote trade between them.
Despite this progress, challenges remain. The BRICS+ do not have a common charter, and the goals of the individual members vary. Nevertheless, the yuan could increasingly serve as an alternative trading currency and accelerate the process of de-dollarization. Countries such as Russia and China have shifted their dollar and euro reserves into gold in recent years, also indicating increasing uncertainty in the global financial system.
In summary, the West, led by the USA, is facing major economic challenges. US national debt is growing and the dollar is steadily losing purchasing power. At the same time, a group of states is forming with BRICS+ that is striving for an alternative financial system. These states have a young population, strong economic growth and large raw material deposits. If this group continues to organize and grow, it could mean the end of the unipolar world order under the dominance of the US dollar.
Current global uncertainty is also reflected in the gold price, which has already risen by around 36% this year. Gold remains a reliable hedge in times of economic instability. No matter how the geopolitical and financial situation develops, confidence in gold remains. Gold will continue to play an important role in the future, regardless of which currency dominates.