BD:Iran’s ‘gold rush’ fails to ease fears over economy
LEAFING through an old family photo album, 74- year-old Molook Amini wished she could afford to buy a gold coin as a wedding gift for her youngest grandchild as she did for others.
"It was always a tradition to give gold coins to close family members on special occasions. This year for the first time I cannot afford to do it any more."
Whether for wedding gifts or as a way to squirrel away savings, Iranians have a long history of buying gold coins, widely available from dealers in high street shops and bazaars. But recently, the steady demand has become a rush.
Amid global economic uncertainty, the price of gold on world markets rose steadily in the first half of this year and Iranian coins appreciated in line with that.
But rather than cashing in their coins for a profit, Iranians continued to buy them in ever larger numbers.
"Usually, as the price of an item increases, demand will decrease. But in the case of gold, it seems that higher prices are creating more demand," says a gold retailer in Tehran who asked not to be identified.
The Iranian gold rush is mainly driven by fears about the domestic economy, particularly the risk of soaring inflation and a wobbly currency, he says.
In addition to concern about a global double-dip recession, the economy has been hit by sanctions as the US leads global pressure on Tehran over a nuclear programme many states say is aimed at building nuclear weapons, a charge Iran denies.
"The reasons people are drawn to these safe assets — gold coins and hard currency — are a limited choice of investment opportunities, and fear from the weakness of the national currency," says an economist who asks not to be named. "These are results of more potential economic instability" in Iran.
Treasured as a store of value, Iran’s gold coins, minted over centuries, are also culturally important. They were traditionally stamped with the faces of kings.
After the 1979 revolution, the Islamic Republic started to issue Bahar-e Azadi (Spring of Liberty ) coins, some engraved with the image of Ayatollah Ruhollah Khomeini, who led the uprising against the last shah.
Produced by the Central Bank of Iran, a standard gold coin weighs 8,133g . It is also sold in smaller denominations of a half coin and a quarter coin.
Last month, the price of a Bahar-e Azadi coin reached a record of 4,55-million rials ($422), compared with 3,12million rials a year ago .
Iranian authorities have repeatedly denied that sanctions are hurting the country, saying the economy is strong. But many Iranians worr y that keeping their wealth in rials is a risk.
"We can keep the coins at home and feel secure," says Mohammad, a 39-year-old stock trader, as financial sanctions have made it harder for ordinary Iranians to transfer capital abroad, for example to buy property in Dubai or Europe.
"In the current situation there are people who can move their capital and invest in other countries, but we as ordinary people have no choice but to invest in gold coins," he says.
Saving rials is also less attractive than a few months ago after the government reduced the interest banks could pay on savings. Returns were slashed in April from a range of 26%-28% to 14%-17%, below what many Iranians believe to be the actual inflation rate.
Worries about the declining buying power of the rial and doubts over the currency’s stability are the main drivers behind the flight to gold.
While the International Monetary Fund (IMF) has praised Iran for reducing inflation to 12,4% for 2010-11 from 25,4% two years earlier, the rate has been creeping back up over the past year to 14,2% in May. Prices have risen much faster for key items such as fuel, water and food as heavy government subsidies are phased out.
Last year, President Mahmoud Ahmadinejad began winding down about $100 bn of subsidies and giving cash payments to families to reduce the effect of price rises. The switch, praised by the IMF, was done despite the predictions that surges in the prices of fuel, food and water could stoke wider inflation.
Many Iranians also sought to change their rials into hard currency, increasing demand for dollars so much that the central bank devalued the rial by almost 11% last month.
That decision did nothing to assuage Iranians’ fears about the safety of their savings. Many economists believe the rial, which is loosely pegged to major world currencies under a "managed floating exchange rate", has not been allowed to devalue in line with inflation and is overvalued by 30% -50%.
As international trade in rials is very limited, the change in its value has no real effect on global markets. It sank to 12500 to the dollar last month, compared with 10500 earlier in the year.
Since the devaluation, central bank governor Mahmoud Bahmani has said he might use a raft of policies to prevent the rial falling further, including possibly restricting the activities of money traders he accuses of profiteering and speculation.
He also says Iran will reverse the bank interest rate decision. "We will curb the fake demand for foreign currency by increasing interest rates," the daily Arman quoted Mr Bahmani as saying last month.
After central bank intervention, injecting hard currency and gold into the market, prices of both the dollar and gold coins have eased. But analysts say fundamental problems will continue to pressure both and have criticised contradictory signals from the government.
Mr Bahmani says the rial will recover to a "market rate" of 10000 rials per dollar and the price of gold will decline.
But such comments, immediately after a devaluation which put the official dollar rate at 11717 rials, have only added to the uncertainty, economists say.
"Signs of confusion over forex policy making are very apparent. The sudden increase (in the dollar) followed by a drop and the announcement of various rates for currency by different finance officials is indicative of that," the economic daily Abrar-e Eqtesadi, wrote last week .
Ordinary Iranians are far from reassured.
"During these times of instability in Iran, the safest form of investment is gold coins because no one knows how much the rial will decline or interest rates will be," says 30-year-old private-sector employee Saba Aqabala.
Grandma Molook hopes she might still find the money to buy her granddaughter the gold coins. "I’m afraid I’ll have to buy her a household appliance . Or just give her the cash." Reuters
