September 29, 2006

Getting in on the Ground Floor Dept.

BOSTON MAGAZINE has a neat article about a Bay State man in the process of making millions of dollars through selling the Iraqi dinar (IQD) to small speculators.

The speculators hope the near-worthless currency will somehow increase in value and result in a windfall. The operators, engaged in work the magazine rightfully describes as between "highly specialized" and "nuts," would like that too. However, one suspects the currency traders are already quite pleased with the markup they're receiving on their IQD. Based on Boston magazine's description of what they do to earn it, though, I'm not entirely sure the risk-reward equation is properly balanced.

Perhaps the natural question while reading the story is whether speculating on the IQD is a good idea, and the answer is Most Certainly Not. Two years ago, I wrote a friend of mine who had brought up the subject:

Thanks for sending this site along. I've heard of several such sites which are selling Iraqi dinars, and it's an interesting concept. According to the purchase price rates your site provides, the value of each IQD is as follows:

25,000 IQD purchase for 40 USD = 625 IQD per 1 USD
50,000 IQD purchase for 75 USD = 666 2/3 IQD per 1 USD
100,000 IQD purchase for 150 USD = 666 2/3 IQD per 1 USD
250,000 IQD purchase for 319 USD = 783.69 IQD per 1 USD
0.5m IQD purchase for 589 USD = 848.90 IQD per 1 USD
1m IQD purchase for 1050 USD = 952.38 IQD per 1 USD
5m IQD purchase for 5125 USD = 975.60 IQD per 1 USD

Here's my take on the matter:

The exchange firm is making out like bandits selling IQD to the God-fearing American public.

As of today, the IQD was trading at 1,461 to the dollar*. This means that were one to sink five thousand dollars into the IQD from this site today, one would need to realize an approximate 50 percent gain in the IQD to make any money. At the $40 purchase rate, one would need the IQD to increase 233 percent in value to make any money.

That said, it is possible the Iraqi dinar may strengthen above these levels. The latest version of the IQD ("Bremer dinar") opened trading at 420 per 1 USD when it was issued, and if the insurgency is wiped out or weakened, the dinar would likely strengthen. In troubled countries, trading the local rouble off for dollars or other hard currencies often becomes a national pastime as the populace -- which usually relies heavily on cash -- seeks to protect what assets they have. But if there are no threats to the Iraqi dinar's store of value, the currency will rise in value vis-a-vis the dollar.

However, there may be unforeseen problems with the IQD. For instance, if the Iraqi Government collapses, its currency will be worthless. If it is revalued (they lop off the zeros at the end and issue a new currency) there will be far less chance for an investor to realize the huge gain needed for profit. And the way I see it, key factors in the IQD's value will be whether it is A) accepted as a settlement currency and B) achieves a measure of
"hardness." ... the Iraqi dinar is at best a very weak soft currency, and at worst inconvertible...

That is to say, at this point in time, it is only useful as a souvenir. It cannot be converted at banks in the United States or elsewhere. It will not be accepted for settlement purposes in the United States or elsewhere. It is true that this could change: the then-worthless Kuwaiti dinar increased 3000 percent in value after the U.S. threw Iraq out of that country during the first Gulf War. I don't see that happening here, even if Iraq diversifies its industrial base, begins to really attract foreign investment, and starts producing oil on a steady and uninterrupted basis -- all things necessary for an increase in the IQD's value...

For more on why speculating in the IQD probably isn't the brightest idea in the world, visit this foreign-exchange company's site.

(via Boston Gal's Open Wallet)

*As of Sept. 27, 2004. The present IQD-USD rate is 1,472.85 IQD per $1.

Posted by Benjamin Kepple at September 29, 2006 10:46 AM | TrackBack
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