China and Russia may be setting aside some of their massive gold production to support a new currency to rival the U.S. dollar, according to Daniel McCarthy, Strategist at DailyFX.com.
“The gold price continues to oscillate around US$ 1,940 going into Tuesday’s trading session as market headwinds might be offset by geopolitical factors that have seen volatility in the precious metal slide lower,” McCarthy said.
He noted that real yields on U.S. 10-year Treasurys recently hit a 14-year peak above 1.90%. “The last time that real yields were this high was 2009, when spot gold was below US$ 1,000,” McCarthy said. “More recently in 2018, when the real yield was near 1.0%, spot gold was under US$ 1,300 an ounce.”
“Of course, there has been a lot of water under the bridge since then and the currents of demand have been tilted as the BRIC (Brazil, Russia, India and China) nations seek an alternative to the US Dollar as a reserve currency,” he said. “Much has recently been made of the potential for a gold-backed currency to allow these countries to bypass the US Dollar in international trade.”
McCarthy said that even though other challenges to U.S. dollar dominance have failed, China’s role in the international gold market, and the recent behavior of other BRICS members, could mean a different outcome this time around.
“On a recent trip to Western Australia, one the largest physical gold-producing regions globally, a number of contacts highlighted that almost every ounce of the yellow metal currently being dug out of the ground was being put on a ship to China,” he said. “Such anecdotes of other BRIC members taking similar actions have been reported elsewhere.”
“Keeping in mind that Australia, China and Russia are also the top producers of gold, it might be the case that gold hoarding has been a feature of the price action of late.”
Russia will set Russian President Vladimir Putin up for a major currency announcement when his country hosts the next BRICS summit in October of 2024.
Any developments on this front, whether it takes the form of a payment platform to intermediate between local currencies, or the new trade currency itself, would be even more significant next year after the BRICS has more than doubled its membership and has added major oil exporters Saudi Arabia, UAE, and Iran.
Russian Deputy Foreign Minister Sergey Ryabkov, told in Moscow on Aug. 25 that Russia’s goal will be to strengthen the bloc’s role and authority as it assumes leadership of the BRICS.
Ryabkov also made clear that Russia was very focused on pushing forward with the bloc’s de-dollarization initiatives. “Consultations are continuing on the creation of effective payment instruments within the BRICS framework, independent of the West, as well as a secure platform for multilateral cross-border settlements,” he said.
Spot gold is down on Tuesday after the long Labor Day weekend, last trading at $1,927.00 at the time of writing, down 0.59% on the day.