Movement of capital
For several decades, countries that mainly export services have been high on lists of countries with the strongest GDP, now that seems to be turning around.
It was long rumored that the BRICS countries would present a new, potentially gold-backed currency during their meeting in South Africa at the end of August. There was no new competitor to the US dollar as a global reserve currency and instead it was announced that the BRICS - Brazil, Russia, India, China and South Africa - invited six more countries to join, namely Argentina, Egypt, Ethiopia, Iran, Saudi Arabia and the UAE. The former member states and the six invitees are on the surface very different but have an important common denominator that may set the tone for what will be important to a country's wealth in the future: they all produce and export several key commodities.
Argentina is an important global producer and exporter of, for example, soybeans and corn, Egypt is an important player in terms of petroleum and cotton, Ethiopia is the world's ninth largest coffee exporter, and Iran, Saudi Arabia and the UAE are, as you know, big in energy and oil.
The new BRICS composition would mean that the 11 member countries account for 46 percent of the global population, measured in US dollars, 38 percent of global GDP and 23 percent of global exports. By comparison, the G7 countries account for only 10 percent of the global population, 29 percent of global GDP and 29 percent of global exports. But, perhaps most important to note is that if Iran, Saudi Arabia and the UAE join BRICS, BRICS' total oil production will account for 43 percent of global production compared to 20 percent before.
The question now is what this could mean for the future? As commodities wake up from their slumber after an extended bear market, more and more people have begun to accept that we are probably at the beginning of a secular bull market for commodities. Rising prices of raw materials also mean that the countries that produce and export the raw materials become richer, which also gossips that what we are seeing now is the beginning of an era where commodity producers rather than service exporters get a bigger share of the pie.
What should we pay with?
Now for the big question: What currency will we settle the majority of international trade with?
As mentioned at the beginning of the article, the gold-backed currency that the world was expecting was not presented during the meeting held at the end of August. However, this does not mean that a currency backed by "hard" money is out of the question. Instead, China continues to signal that gold will continue to fulfill an important function as a store of value in the future.
For the first time since 2019, China reports how much gold it buys, and it's a lot. For the tenth month in a row, China bought gold, 155 tons to be exact, and the total share of gold in China's foreign exchange reserves is over 4 percent, which is the highest measured share in China ever. What China's public purchase of gold means in the long term, we can only speculate today, but for those who believe in a future with hard currencies, it is of course possible to see China's gold purchase as proof that an RMB backed by gold is a possible scenario in the future .
But how much is RMB actually used globally today?
The renminbi is the fifth most used currency globally today with a share of 1.91 percent in January 2023. Slowly we can see the RMB taking a bigger place in international trade and for the first time ever, China settled more cross-border transactions in its local currency rather than with the US dollar in the first quarter of this year.
It appears that the general trend in international trade is for parties to more often choose one of the currencies of the countries they trade with rather than just the USD. With China as the world's largest exporter, it is not unreasonable to imagine that the proportion of trade settled in RMB could grow even larger.
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