BRICs and Gold

Hey, investors, leave the developing countries alone

All in all, it's just another BRIC in the wall

BRIC is the acronym for Brazil, Russia, India, and China. The term was coined in 2001 to refer to these fast-growing emerging economies and, by implication, their mutual benefits from forming alliances with each other. In 2010, South Africa was added, forming BRICS.

The BRICS demonstrate a great deal of potential, as they account for more than two-fifths of the world’s population and more than a quarter of its land. According to the publication “Dreaming with BRICs: The Path to 2050”, the four large economies have the capability to be larger than the G6 in U.S. dollar terms and to become the dominant global economic power by 2050.

Goldman Sachs predicts that a few decades from now, the market for raw materials (such as iron and soy) will be dominated by Brazil, the market for petroleum products by Russia, and the market for manufactured goods by India and China.

BRIC and Gold

What are the links between the BRIC countries and gold? Well, the economic development of the bloc may undermine the U.S. dollar, supporting the yellow metal. These countries account for more than 30 percent of global GDP (according to purchasing power parity). Some forecasters even argue that they may relatively soon become dominant economic powers capable of creating an alternative reserve currency to the greenback and challenging American dominance.

It would be a positive scenario for gold, which is often negatively correlated with the U.S. dollar. And if the BRIC countries re-monetize gold for trade in goods, creating a new gold standard, the yellow metal could shine particularly bright.

Although that vision sounds nice, it’s not very likely, and the reality is not so rosy. Actually, the BRIC countries have had a hard time in the 2010s and early 2020s. Their economic performance has been disappointing. Just think about the severe economic crisis in Brazil that started in 2014, the lockdowns in China, or the economic isolation of Russia after it invaded Ukraine. Actually, given the great Brazilian recession and industrially atrophied economy of Russia, the story of the BRICS is largely about China’s staggering rise, as China’s GDP is more than double that of the other four BRICS combined (see the chart below). Not surprisingly, some analysts started to denote the acronym as “Bloody Ridiculous Investment Concept.” And the status of the U.S. dollar has not been challenged.

Hence, although it would be unwise to write off the BRIC countries, the opinions about their economic bloom and impact on the gold market were exaggerated. The yellow metal would, thus, remain linked to the U.S. dollar rather than to the BRIC currencies.

Another interesting link between the BRIC countries and gold is that the central banks and citizens of these countries are major buyers of the yellow metal as either a reserve asset or as gold jewelry. However, as a driver of gold prices, investment demand is much more important than consumption demand or central banks’ purchases.