Since the beginning of 2012, the Iranian rial has been devalued against the US dollar by over 80%. However, last week saw the devaluation gain pace dramatically with the currency falling by 18% on Monday and 9% on Tuesday.
This is causing a crisis in the country where prices have reportedly gone up by between 40 and 70%. The Guardian quotes a housewife in Tehran, “The current crisis evokes the bad old days of the Iran-Iraq war…it’s like the war years, the price today is different from the price yesterday.” Shops are said to be closed or at least trying to refrain from trade as the rial has been turned into one of the cheapest currencies in the world.
The Iranian president, Mahmoud Ahmadinejad, has reportedly blamed the country’s enemies for the continuing collapse of the currency.
However, Dr. Mehrdad Emadi, external economic adviser to the European Union, told the BBC that the rapid decline was thanks to the Iranian government’s inability to maintain confidence in the currency.
The acceleration in the rial’s losses is thanks to a government sponsored “exchange center” set up to supply importers with cheaper-than-market-rate dollars. Added to this, they are stepping up efforts to shut down the “unofficial” (i.e. real) FX market in the Islamic republic in order to restrict the availability of the US dollar, triggering worries of a dollar shortage.
This has merely sped up the race for the US dollar as by prioritizing foreign exchange the government has effectively signaled that there is a need to panic. This has led to a tremendous lack of confidence in the government’s ability to manage their currency and keep it strong. The attempt to fix the US dollar supply issue has triggered a far worse psychological reaction than had been foreseen.
The fall in the value of the rial of course makes imports significantly more expensive and is likely to lead to the US dollar, as well as gold, being hoarded in the hope of their increasing in value further. Very few have access to the government’s exchange center, with the majority of individuals still paying the high exchange rate.
This is the most modern example to date of how when the only thing backing a fiat currency is confidence and when all confidence is lost, then the country’s citizens better hold onto their hats, or protect their wealth with gold.
As the citizens of Iran sit and watch their currency go under, the demand for gold has been something which should be made note of. On Monday in Tehran exchange volume of the yellow metal was up almost 18% and since then the government have accused individuals of “hoarding” gold and foreign currency.
The people of the Islamic Republic have been preparing for this for some time. This sudden fall in the rial has been brewing for some time and is not a huge shock, it has been falling in value for some time.
It has been no secret that Turkey’s trade deficit has been dramatically reduced thanks to gold exports, many of which have been to their neighbor Iran. In the first six months of this year, gold exports from Turkey to the Islamic republic were in excess of $6 billion.
The country was clearly stocking up on gold for two main reasons.
First, citizens, in an effort to protect their savings from the inflationary impact of the president’s policies, were investing in gold as a hedge against the devaluation of the money supply. Many Iranians have lost faith in their own currency; following the Western sanctions and therefore the drop in oil exports (which accounts for 80% of export revenue) many have rushed to convert their savings into foreign currency and gold. Latest figures suggest inflation is running as high as 24%, meanwhile gold has gained 25% in Q3 when priced in rials. This week alone the gold price has reached 12 million rials.
Secondly, it is common knowledge that the gold will be used to circumvent increasingly tighter Western sanctions, aimed at forcing the country to curb its nuclear programs. Several non-Western nations are rumored to have agreed to the trade of gold in exchange for vital imports.
Iran’s gold imports are certainly seen as a threat by the Western world and the EU have now placed a ban on exports of gold to Iran.
Learn from the Present
Back in 2007 President Ahmadinejad referred to the US dollar as “a worthless piece of paper.” Normally we couldn’t agree more, however unfortunately for him, at the moment his own currency is even more worthless. The US dollar may well be the currency of choice at present but it cannot be long until Iran’s citizens see the damaging effect relying on another over-printed currency can do to your livelihood.
In the Western world we seem to get overly excited whenever some hedge fund claims they’re bullish on gold and silver, or the gold price rises on the back of a central bank announcement. But here we see yet another country which is being torn apart by paper money, holding onto their gold, without some PR release telling them to do so.
Whilst many of us are predisposed with the worry of what will happen with our own financial system we have a fully primed example of what happens when the only thing backing a fiat currency, confidence, disappears; the government, its trading partners and its citizens turn to gold. It is the only thing which, in the long term, will protect wealth.
Whether this is economic warfare with the US is an issue for an entirely different article, however this type of economic destruction has been seen in the past. The devaluation of a currency causes huge damage to the populace from within, each time individuals tell themselves that we must never allow a currency to be able to be manipulated in such a way again.
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