Main financial assets discussed: SPDR Gold Shares ETF (GLD)
Top 3 key points:
1. Russia's announcement that the BRICS currency will be backed by gold suggests a potential opportunity for gold. Speculation around a BRICS gold standard could strengthen a bullish trend in the market.
2. Multiple factors are fueling the bullish sentiment towards gold, including global central banks diversifying away from U.S. assets, concerns about inflation and US fiscal deficits, and the potential economic downturn indicated by the persistent yield curve inversion.
3. The threat of a functioning BRICS gold standard dethroning the USD is unlikely due to the challenges of building the necessary financial system infrastructure and the lack of trust in the BRICS countries to redeem the currency for actual gold.
Recommended actions: **Buy** gold or GLD now while the rumors of a BRICS gold standard are still circulating, and then **sell** when the news about the gold standard is officially released at the BRICS summit in August. Consider using GLD options to hedge against potential downside risk.
Main financial assets discussed:
- U.S. government debt (long-term U.S. treasuries)
Top 3 key points:
1. The U.S. government has proven its ability to transform its fiscal situation and maintain solvency over the long term. It has the flexibility to change revenue and transfer arrangements to maximize efficiency and growth.
2. Wall Street tends to have a myopic view and is often critical of the government, but the U.S. government is the world's largest financial entity and has the confidence of the rest of the world. It is likely to maintain its status as a world reserve currency.
3. Political polarization and bias can compromise decision-making and accuracy in financial analysis. It's important to suspend emotional thinking and political beliefs when evaluating the government as a financial entity.
Recommended actions: **Buy** long-term U.S. treasuries (iShares 20+ Year Treasury Bond ETF) as a proxy for the "stock" of the United States of America. The countercyclical characteristics of these bonds make them a good hedge against stocks, and recent price action suggests that rates will likely reverse recent gains. The U.S. government's ability to adapt and its long-term competitiveness make it a favorable investment. However, there are risks to consider, such as long-term elevated inflation and policy paralysis, which could impact the thesis.
### Summary
Many developing countries are frustrated with the dominance of the US dollar in the global financial system and are seeking alternatives, but no concrete proposals have emerged. The dollar's influence can destabilize economies and impose financial sanctions on adversaries. However, the alternatives to the dollar have not gained enough traction, and the dollar remains the most-used currency in global business.
### Facts
- The strength of the US dollar against the Nigerian currency has made imported goods, like garments, unaffordable for local consumers.
- The BRICS bloc, consisting of Brazil, Russia, India, China, and South Africa, along with other emerging market countries, are meeting to express their grievances about the dominance of the dollar in the global financial system.
- The BRICS countries have discussed expanding trade in their own currencies to reduce reliance on the dollar.
- The US dollar is the most-used currency in global business and has shrugged off past challenges to its preeminence.
- The alternatives to the dollar, such as the euro and China's yuan, have not gained enough international gravitas.
- The dollar's influence can impose financial sanctions and destabilize economies.
- Many developing countries, like Kenya and Zimbabwe, have expressed their frustrations with the dollar and are seeking alternatives.
- Despite the frustrations, the dollar still has its supporters and is seen as a stabilizing force in some economies.
### Summary
Many developing countries, including BRICS nations, are frustrated with the dominance of the U.S. dollar and will discuss alternatives at a summit in Johannesburg. However, the dollar's position as the dominant global currency remains unchallenged.
### Facts
- The strength of the U.S. dollar against local currencies in developing countries has caused prices of foreign goods to soar, leading to reduced sales and job layoffs.
- The BRICS bloc, consisting of Brazil, Russia, India, China, and South Africa, along with other emerging market countries, will discuss their grievances against the U.S. dollar's dominance at a summit in Johannesburg.
- The BRICS countries have previously talked about introducing their own currency, but no concrete proposals have emerged. However, they have discussed expanding trade in their own currencies to reduce reliance on the U.S. dollar.
- The U.S. dollar is the most widely used currency in global business and previous challenges to its dominance have failed.
- The BRICS countries launched the New Development Bank in 2015 as an alternative to the U.S. and European-dominated International Monetary Fund and World Bank.
- Developing countries are concerned about the U.S.'s use of the dollar's global influence to impose financial sanctions and the destabilizing effects of fluctuations in the dollar on their economies.
- While the euro and China's yuan have gained some traction in recent years, they still do not rival the dollar in terms of international gravitas.
- The alternatives to the dollar have not been able to gain dominance, and any shift away from the dollar will take time and trust.
- Some countries, such as Argentina and Zimbabwe, have experienced economic turmoil and have turned to the U.S. dollar for stability.
### Summary
The BRICS countries, consisting of Brazil, Russia, India, China, and South Africa, are holding a summit in Johannesburg to challenge Western economic dominance. They aim to create a multipolar global order and are open to expansion.
### Facts
- The BRICS countries represent 23% of the world's GDP and 42% of the world's population.
- The group was formed in 2009 and meets annually to assert their position against the US and EU.
- The BRICS bloc is now open to expansion, with 23 applicants and numerous interested parties.
- The New Development Bank, an alternative to the World Bank and IMF, has invested $30 billion in infrastructure projects.
- Russia's President Putin, who is the target of an ICC arrest warrant, will attend the summit via video link.
- The BRICS countries aim to decrease their reliance on the US dollar and increase the use of their national currencies.
- They also plan to create their own international university rankings, challenging existing rankings that may exclude certain countries for political reasons.
### Summary
India is unlikely to endorse a common BRICS currency, as it fears China's dominance in the bloc and the strengthening of the yuan. However, it may not immediately block discussions on the proposed currency at the BRICS Summit.
### Facts
- 🚫 India is not interested in being part of the proposed BRICS currency, as it sees it as China's attempt to gain hegemony.
- 🔄 India may not use its veto power to stop the currency proposal immediately, but it has concerns about China's dominating role.
- 🤝 The proposed BRICS currency is expected to heavily benefit China, as it is the dominant economy in the bloc.
- 🌍 The plan for a common BRICS currency may take time due to the different levels of economic development among the members.
- 📅 The 15th BRICS Summit will be held in Johannesburg from August 22-24, with leaders from Brazil, Russia, India, China, and South Africa expected to attend.
- 💲 The US dollar accounts for 58.36% of global foreign exchange reserves, while the Chinese yuan only accounts for 2.7%.
- 💱 Determining the value of the proposed BRICS currency would be a challenge due to the differing economic situations of the member countries.
- 💼 Harmonizing financial rules and regulations, such as debt-to-GDP ratio, would also be difficult for the BRICS members.
- 💔 Weaker economies in the EU, like Greece and Portugal, faced difficulties when the euro was introduced, and BRICS countries lack sufficient social security to handle strict debt-to-GDP ratios.
### Summary
The strength of the U.S. dollar against other currencies, such as the Nigerian naira and Zimbabwean dollar, has made it difficult for local consumers to buy foreign goods, leading to economic troubles in these countries.
### Facts
- 💰 The strength of the U.S. dollar has pushed the price of foreign goods beyond the reach of local consumers in Nigeria.
- 💸 Many developing countries are unhappy with the dominance of the U.S. dollar in the global financial system.
- 🌍 The BRICS bloc, which includes Brazil, Russia, India, China, and South Africa, will discuss their grievances against the dollar at a meeting in Johannesburg, South Africa.
- 💵 The alternatives to the U.S. dollar, such as the euro and China's yuan, have not been able to rival its dominance.
- 🇦🇷 In Argentina, a presidential candidate is calling for the U.S. dollar to replace the country's troubled peso.
- 💼 In Zimbabwe, the U.S. dollar is widely used in transactions due to the instability of the Zimbabwean dollar.
- 💸 Vendors in Zimbabwe are even mending damaged U.S. dollar bills for a small fee due to a shortage.
### Credit
By: Dionne Searcey and Constant Méheut
Source: The Washington Post
### Summary
China's foreign trade with other BRICS countries (Brazil, Russia, India, and South Africa) increased by 19.1% in the first seven months of 2023, reaching 2.38 trillion yuan ($326.85 billion).
### Facts
- 💼 In the January-July period of 2023, China's trade with other BRICS countries accounted for 10.1% of its total foreign trade value, rising by 1.6 percentage points.
- 📈 China's exports to BRICS countries reached 1.23 trillion yuan, showing a year-on-year growth of 23.9%.
- 📉 China's imports from BRICS countries amounted to 1.15 trillion yuan, with a year-on-year growth of 14.3%.
- 🌐 China's private companies expanded their trade with BRICS countries, with a trade volume of 1.36 trillion yuan, representing a year-on-year growth of 29.4% and accounting for 57.1% of the total trade volume between China and BRICS countries during the period.
- 🔧 Since its establishment in 2006, the BRICS mechanism has become a significant driver for global economic recovery and has continuously strengthened economic and trade cooperation among its member countries.
The Brics economic group, consisting of Brazil, Russia, India, China, and South Africa, is discussing the possibility of expanding its membership and promoting the use of local currencies for trade settlement, with aims to challenge the dominance of the US dollar, but analysts believe that the greenback is unlikely to lose its status as the international reserve currency.
Global financial companies have sold $2 trillion worth of bonds in a record amount of time this year, with European lenders paying off central bank loans and Chinese firms strengthening their balance sheets amidst economic uncertainty.
Japanese and Chinese central banks have significantly reduced their holdings of US Treasury bonds, making it less likely that their interventions in the foreign exchange market would disrupt global markets or strike fear into bond investors.
The BRICS summit is aiming to reduce reliance on the U.S. Dollar, as the coalition confirms new members including UAE, Egypt, Ethiopia, Saudi Arabia, and Argentina, and discusses the possibility of a new payment system and currency backed by gold.
The BRICS, a bloc of emerging market nations, has expanded its membership to include Saudi Arabia, Iran, Egypt, Argentina, Ethiopia, and the United Arab Emirates (UAE), with the goal of building a fair, just, inclusive, and prosperous world; however, experts question whether BRICS can effectively compete with the West given their differing priorities, and the ambition of creating a common BRICS currency to rival the dollar is unlikely to materialize due to competing interests and priorities among member states.
The BRICS nations are divided on the issue of de-dollarization, as statements from the bloc's leaders indicated, despite discussions about the creation of a common currency to rival the US dollar.
The dollar is not likely to lose its status as the global reserve currency despite the expansion of the BRICS group of nations and their aim to find an alternative, as technology and not commodity-based currencies are expected to be the driving force in the future.
The BRICS bloc, which has now expanded to include 11 countries, controls 30% of the global economy, 46% of the world's population, and a significant share of commodities such as manganese, graphite, nickel, and copper, as well as 42% of the global oil supply, potentially putting pressure on the US economy and challenging the traditional world order.
JP Morgan predicts that the U.S. dollar is at risk of losing its global reserve status as BRICS countries increase their use of local currencies for trade settlement, although the chances of this happening in the near future are slim.
Developing countries, including members of the BRICS and ASEAN alliances, are actively seeking to reduce their dependency on the US dollar and promote their local currencies for global trade, with a total of 21 countries officially agreeing to ditch the US dollar in 2023.
Creating a BRICS currency backed by gold is considered nonsensical by a former Bank of America strategist, as it would essentially be another gold derivative and would weaken individual currencies within the group.
The BRICS expansion, which includes countries like Saudi Arabia, the UAE, and Iran, has raised concerns in the U.S. and EU as it poses a threat to Western-dominated financial markets, while China's influence grows and the alliance aims for de-dollarization in global trade.
Foreign holdings of U.S. Treasuries increased for a second consecutive month in July, reaching $7.655 trillion, despite uncertain interest rates and mixed economic data, with China's holdings dropping to the lowest level since 2009, potentially due to pressure to defend its weakening currency.
China has continued to decrease its holdings of US Treasury bills, but there are suggestions that as the rate-hike cycle nears its end, policymakers in Beijing may need to reconsider their decision to unload Treasuries.
Developing countries, including the BRICS alliance, are looking to end reliance on the US dollar due to increasing debt and the threat of inflation, which could lead to a decline in the dollar's value and a rise in prices. Economist Peter Schiff warns of a tragic ending for the US dollar if other countries continue to move away from it.
The BRICS bloc, including countries like India, China, and Russia, is slowly reducing its dependency on the US dollar and using their local currencies for trade, which could potentially weaken the US dollar's position as the dominant global currency.
The BRICS coalition, along with new members, aims to reduce the dominance of the US dollar by using their own currencies for oil trade, posing potential risks to the US's global leadership and economy.
Bitcoin and gold are expected to thrive amidst fiscal problems in the US economy and a potential pivot from the Federal Reserve, according to macro investor Luke Gromen. Gromen also suggests that the launch of a gold-backed currency by the BRICS alliance may weaken the US dollar as the world's reserve currency.
A bond sell-off is driving up government borrowing costs as the financial markets worry about high interest rates; yields on 30-year UK government bonds have reached 5% for the first time in a year, while the yield on 30-year US Treasures hit a 16-year high, causing a selloff that affected currencies such as the yen and rouble.
The American banking, trade, forex, tourism, and other sectors could be severely impacted if BRICS countries stop using the U.S. dollar for trade, leading to potential financial catastrophe and hyperinflation.
China, Brazil, and Saudi Arabia are reducing their US Treasury holdings, with China selling nearly $500 billion in US Treasuries over the past decade.
BRICS (Brazil, Russia, India, China, South Africa) is aiming to challenge the global reserve status of the US dollar by exerting control over a significant portion of the oil sector, starting with Russia's Gazprom Neft announcing that it will no longer rely on the US dollar for trade and is open to accepting local currencies.
China, Brazil, Saudi Arabia, and other countries have been reducing their holdings of US Treasury bonds, potentially indicating a slowdown in their economies or a strategic shift.
Rising concerns over U.S. government spending and the budget deficit have led to a sell-off in Treasury bonds, pushing prices to 17-year lows as bond vigilantes punish profligate governments by selling their bonds.
BRICS has surpassed the G7 in terms of purchasing power parity, contributing 31.5% to global GDP compared to the G7's 30.7%, and if BRICS succeeds in ditching the US dollar for global trade, the gap could widen further, potentially tilting financial power to the East.
The US Treasury is set to auction off 20-year bonds, which has the potential to negatively impact the stock market.
Foreign holdings of U.S. Treasuries reached their highest level since December 2021 in August, with total holdings climbing to $7.707 trillion, driven by continued buying from Japanese investors, while China's holdings fell to their lowest level since 2009.
The BRICS alliance, specifically China, is selling off billions worth of US treasuries and stocks to defend the weakened Yuan and halt the rise of the US dollar against the Yuan, with China alone dumping $21.2 billion in August, the highest in four years.
The relentless selling of U.S. government bonds has caused Treasury yields to reach their highest level in over 15 years, impacting stocks, real estate, and the global financial system as a whole.
China may continue to cut its US debt holdings amid worries over shrinking liquidity and safety risks, as well as efforts to diversify foreign exchange reserves. China has reduced its US debt holdings for five consecutive months, while Japan and the UK have increased theirs. Experts believe China's actions are driven by the poor performance of US Treasury bonds, the need for more sophisticated foreign exchange reserve management, and concerns over geopolitical risks. The abuse of the dollar's hegemony status by the US has also damaged global trust in the greenback and contributed to a trend of de-dollarization.
The induction of new countries, particularly oil-exporting nations, into the BRICS alliance and their potential demand for the US and Europe to pay for oil in local currencies could decrease the demand for the US dollar and lead to its depreciation, impacting the purchasing power of the dollar and rewriting trade policies. However, it is unlikely that BRICS would be able to successfully demand this, as it could result in the loss of bilateral trade deals with the West and negatively impact their GDP and economy.
