Gold and the BRICS

This gold market continues to surprise on the upside. We think dedollarization will proceed very slowly but is likely already supporting the gold market.

In January of this year, I wrote:

There is an old saying, as popularised by the Wizard of Id comic strip:

Remember the Golden Rule! Whoever has the gold makes the rules.

In this world, there are two kinds of gold in play. One is control of the US dollar denominated financial system. The other is control of global trade in goods and services.

When I wrote that, on 8-Jan-24, spot gold was trading at US$2043/oz. Now it trades at US$2719/oz. Back then, the S&P 500 closed at 4763.55, and is now 5809.87.

This has been a short race, but gold is up 33.09% while the S&P 500 is up 21.52%.

Wait a second, gold pays no income, but the S&P 500 contains income paying stocks.

Include those and the S&P 500 is up 23.31%. You made 1.34% off the dividends!

This sort of return disparity is not unprecedented, but is generally unusual, especially in a period of falling headline inflation. Gold is clearly in demand.

Let us dig into this a little further and pick out some ASX listed gold plays to go with this broadening bull market. The key driver appears to be folks in the Global South.

Why do the BRICS nations matter?

The acronym BRIC was first coined by then Goldman Sachs strategist Jim O’Neill to draw attention to the growth in the emerging economies, that would eventually supplant the G7 group of rich nations.

Although O’Neill has since been a vocal critic of the BRICS assemblage of nations, his economic forecasts made in 2001 proved to underestimate the eventual result.

It was a prescient piece of research.

You can read the original report here: Building Better Global Economic BRICs.

Originally, O’Neill only looked at Brazil, Russia, India and China (BRIC).

However, to his credit, the idea captured the imagination of both investors and those governments who stood to benefit most from this historic economic expansion.

O’Neill later left Goldman Sachs, became a Baron, and changed his tune.

Recently he penned the BRICS-dissing piece: The BRICS Still Don’t Matter.

It is okay to disagree with your younger self.

Many of us do.

I only mention this to highlight that the growth of the BRICS nations is now viewed less as an opportunity for investment banks, and more of a threat.

If you are a dinosaur, I guess that any bright fireball on the horizon looks like a threat.

I was never in line for a peerage, so I am not that worried by it.

The simple fact is that the BRICS are a bigger deal now, in 2024, than they were in 2001. Call me strange, but I think they will be an even bigger deal in 2051.

Shortly after O’Neill’s BRIC report came out, I encountered The World Economy: Historical Statistics, by Angus Maddison, a landmark study in economic history.

This had some great charts like this one:

Estimates of historical GDP share by Angus Maddison.

Once you understood the historical basis for that, it seemed a bit chauvinist to me to suppose that China, India, and the Middle East, could not rebuild some lost share.

Note that this is GDP share, not absolute GDP, nor GDP per capita.

Of course, GDP share is a zero-sum game, but growing the total economic pie is a positive sum game. Populist politicians like to pitch things differently.

"China has an overall goal ... to become the leading country in the world, the wealthiest country in the world, and the most powerful country in the world," he told reporters at the White House. "That's not going to happen on my watch because the United States is going to continue to grow." - Joe Biden 26-Mar-21

Let me see, the Chinese were that for 800+ years according to Maddison.

The Chinese may get a bit cranky if you tell them they can’t lead now.

Who says? Why? Are you going to make them stay poorer?

There are 1.418B people in China and 346M in the USA.

The 2023 GDP of China was US$17.79T and that of the USA $US28.87T

Are you going to let China reach the same per capita GDP?

That would be US$83.4K per Chinese person.

Multiply that out and the upper limit to China GDP is US$72.9T.

Siren sounds… wrong answer!

It must be per capita.

Clearly, we can only allow US$20.4K GDP per Chinese person.

That is a bad answer, because they are richer, but it looks much better.

Now, everything in the Grand Biden Plan is made crystal clear.

Every Chinese is allowed to have a piece of GDP pie that is 24.4% the size of every piece of GDP pie in the hands of every red-blooded god-fearing American.

That seems fair. Joe Biden said so. The Chinese are thinner people anyway.

What happens when you decide to limit the BRICS GDP also?

What is the magic rule? Does Uncle Sam just make it up, or is there a formula?

You can appreciate that I think these social attitudes are positively prehistoric.

They are neither civilized nor conducive to maintaining civilization as we know it.

Clearly, the BRICS nations do matter.

That is an awful lot of people to be treating with disdain and outright disrespect.