Ever since the end of World War II, the U.S. Dollar has been the most commonly held reserve currency and the most widely used currency for international trade and other transactions around the world. The status of the U.S. Dollar as the world’s primary reserve currency has given the United States significant advantages. It means that central banks around the world hold large amounts of U.S. dollars as part of their foreign exchange reserves. This has helped stabilize the global financial system and provided confidence in international trade and investments. The U.S. Dollar’s widespread use in international trade simplifies transactions and reduces currency exchange risks for businesses and governments. Moreover, since many commodities, particularly oil, are priced and traded in dollars, countries need to hold dollar reserves to facilitate these transactions.
This further strengthens the dollar’s position in the global economy. Some countries have chosen to peg their currencies to the U.S. Dollar to benefit from its stability and credibility. However, the extensive use of the dollar in global payments also amplifies the impact of U.S. financial sanctions. The United States has used its influence over the dollar-based financial system to apply economic pressure on nations it deems non-compliant with its policies. Due to these sanctions, many countries are proposing an alternative to the U.S. Dollar for international trade; Enter the BRICS Initiative.
In response to the potential risks associated with the U.S. Dollar’s dominance, various countries have explored alternatives. One significant initiative is the BRICS (Brazil, Russia, India, China, and South Africa) group, which aims to enhance economic cooperation and challenge the dominance of the dollar for international trade, have come together in an attempt to establish a new international reserve currency that will be backed by Gold.
The appeal of gold lies in its stability as a store of value. Throughout history, gold has weathered economic uncertainties and served as a reliable benchmark of true value. In history, using gold-backed currency (often referred to as the Gold-Standard) played a significant role in stabilizing value, prosperity, fixed exchange rates, and peace. The U.S. was once on the Gold-Standard since the end of World War II, however, The United States dropped the Gold-Standard in 1971 when President Nixon ended dollar convertibility to gold.
The United States’ decision to shift away from Gold has caused the geopolitical world we live in today, which has opened the door for the BRICS countries to unite against the United States. The BRICS Initiative is poised to challenge the United States’ ability to wield financial influence over the rest of the world by decreasing demand for the U.S. Dollar.
In the last two years alone, the BRICS nations have increased their gold buying expenditure to end reliance on the U.S. dollar. The World Gold Council published a report saying that; China purchased over 102 tonnes (1 tonne is the equivalent of 1,000 kilograms or 2,205 lbs) of gold and that Russia has purchased over 31.1 tonnes of precious metal in the last six months alone. In addition, India added 2.8 tonnes to its gold reserves in the early months of 2023, for the first time in over a year, and is expected to add more by the end of the year.
With the BRICS nations stockpiling gold, these moves put the U.S. dollar in jeopardy as gold would be used as collateral and end the reliance on the U.S. dollar. With the ever-growing debt crisis the United States is facing, an impeding domino effect of financial problems will arise for many developing countries. With the appeal of the BRICS currency being backed by gold, more than 130 countries have shown interest in dropping the U.S. Dollar for international trade.
