Is the world on the cusp of Bretton Woods 3.0, 52 years

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(Kitco News) – Insatiable demand for gold from central banks as they diversify away from the U.S. dollar and the growing influence of BRICS nations to compete against the greenback’s role as the world’s reserve currency are bringing new significance to a momentous anniversary.

Fifty-two years ago today, then-President Richard Nixon closed the gold window. No longer would the U.S. dollar be convertible to the precious metal. The move signaled the end of the Bretton Woods Agreement.

Economists have noted that since the world moved away from the gold standard, global growth has soared, built on credit and free-floating fiat currencies. In 1972, global GDP was $3.8 trillion. According to estimates from the International Monetary Fund, global GDP today is valued at $105 trillion, and is up $5 trillion from 2022.

The size of the global economy is one reason why many economists don’t expect a return to the gold standard anytime soon.

“Gold mined last year was worth about $225 billion,” said Marc Chandler, managing director of Bannockburn Global Forex. “Fed acts as a custodian for foreign central banks. Its custody holdings are up $136 billion this year. Last week alone, the U.S. raised over $250 billion in bill sales and $100 billion in coupons.”

He added that because the global credit market is so big, gold prices would have to be sharply higher to play a more significant role in the global M2 money supply.

“I do not see gold being able to absorb the huge flows that the US Treasury market does,” he said.

Although a new type of gold standard is unlikely to be launched anytime soon, there are growing concerns about the U.S. dollar’s role as the world’s reserve currency, and many analysts see gold playing an increasingly important role as a monetary metal in a multipolar currency world.

In a recent interview with Kitco News, Willem Middelkoop, creator and chief investment officer of Commodity Discovery Fund, said that there is a growing distrust in the U.S. dollar and U.S. debt and he believes gold is poised to be the biggest beneficiary of the current de-dollarization trend.

Brazil, Russia, India, China and South Africa, known collectively as BRICS, are quickly becoming the biggest threat to the U.S. dollar as the world’s reserve currency. The group of countries is expected to add new members at its summit in South Africa later this month.

Analysts have noted that more than 20 countries have formally asked to join the BRICS, including Saudi Arabia, Argentina, Iran, and the United Arab Emirates.

Andy Schectman, President and Owner of Miles Franklin, told Kitco News in a recent interview that an expanded BRICS could eventually represent 85% of the global population. He noted that there are a lot of people who could potentially dump the U.S. dollar in favor of other currencies.

Middelkoop said that even without expanding, the combined GDP of current BRICS nations is larger than that of the Group of Seven industrial nations. Middelkoop said that although it will take a while, trade agreements between BRICS nations can compete with the U.S. dollar as a reserve currency.

“It takes decades to build a new system, but I think we can say that the BRICS conference later this month in Johannesburg is the start of Bretton Woods 3.0,” he said.

While it’s unlikely nations will embrace a new gold standard, Middelkoop said that investors shouldn’t ignore the bigger picture.

“Investors get caught up in these binary views of the market,” he said. “It’s always black or white, it’s either a gold standard or not. But they forget there are a thousand shades of gray. I always use the term gold-linked, not gold-backed. We don’t need a full gold standard, but when China makes the yuan gold convertible in some way that trading partners can settle their trade balances at the end of the year in gold, you will have some kind of gold-linked system.”

While the U.S. isn’t expected to give up its role as the world’s reserve currency without a fight, Middelkoop said that is not an all-or-nothing position anymore.

“I don’t think we can look for binary solutions anymore. It won’t be the gold standard; it won’t even be the dollar standard or the yuan standard. I see the development of parallel systems as we move away from the unipolar to a multipolar currency world. We’ll have a multipolar world for quite a long time and that will be good for gold.”

Within the BRICS group, China’s yuan has become the most prominent front-runner to compete head-to-head with the U.S. dollar as the world’s reserve currency. Analysts note that China has put Western nations on notice as it has bought gold for nine consecutive months in an attempt to strengthen the international credibility of the yuan, totalling more than 100 tonnes in gold purchases. 

Although it has dominated the gold market this year, China is not alone. The World Gold Council noted that central bank gold demand hit record levels in the first half of 2023.

While demand is not expected to reach last year’s levels, the WGC has said that central bank demand is forecast to remain robust through the rest of the year.

In a June interview with Kitco News, Tavi Costa, portfolio manager at Crescat Capital, said that he suspects central banks have only started on what will be a long-term gold-buying trend.

“What’s happening today with central banks buying gold, is that re-emphasizes this sort of chess game being played around these de-globalization trends and the need to own neutral assets,” he said. “With interest rates around the world moving higher, we are going to see a lot more volatility in foreign exchange markets. In this environment, central banks will need to enhance their reserves over time by owning more precious metals.”

In his research, Costa noted that historically gold represented about 40% of all global reserves; in the early 1980s, gold represented more than 70% of foreign reserves. He said that if central banks’ gold holdings returned to historical averages, they would need to buy $3.2 trillion worth of the precious metal.