Iranians Go for Gold

It’s not just the Greeks, but latest reports say that Iranians too have been stampeding into gold.

From the Reuters, (bold emphasis mine)

Amid global economic uncertainty, the price of gold on world markets rose steadily in the first half of 2011 and Iranian coins appreciated in line with that. 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," said a gold retailer in Tehran who asked not to be identified.

The Iranian gold rush was mainly driven by fears about the domestic economy, particularly the risk of soaring inflation and a wobbly currency, he said.

In addition to concerns about a global double-dip recession, the economy has been hit by sanctions as the United States leads global pressure on Tehran over a nuclear program many states say is aimed at building atomic weapons, a charge Iran denies.

Here’s a glimpse of the Iranian rial-US dollar performance

Below is a chart of Iran’s inflation rate

US-Rial, and Iran inflation rate from Wikipedia.org

The Iranina rial-euro over the past 5 years (yahoo finance)

More from the same Reuters article, (bold emphasis added)

Saving rials is also less attractive than a few months ago after the government reduced the level of interest banks could pay on savings. Returns were slashed in April from a range of 26-28 percent to 14-17 percent, 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 has praised Iran for reducing inflation to 12.4 percent for 2010-11 from 25.4 percent two years earlier, the rate has been creeping back up over the last year to 14.2 percent in May. Prices have risen much faster for key items such as fuel, water and food as heavy government subsidies are phased out.

At the end of last year, President Mahmoud Ahmadinejad started winding down some $100 billion of subsidies and giving direct cash payments to families to reduce the impact 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.

As well as hoarding gold, many Iranians sought to change their rials into hard currency, increasing demand for dollars so much that the Central Bank devalued the rial by almost 11 percent last month.

That sudden 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 between 30 and 50 percent.

As international trade in rials is very limited, the change in its value has no real impact on global markets.

It sank to 12,500 to the dollar last month, compared to 10,500 earlier in the year.

Same problems haunt paper money system, whether the US dollar, Belarus ruble, Greek drachma or Vietnam Dong or Iranian rial.

Fundamentally, the pathology stems from an overspending welfare state, which has been financed by government’s inflationism and artificially low interest rates, where the crescendoing ramifications of such accrued imbalances have been vented on a devaluing domestic currency and on rising prices of domestic consumer goods and services.

Uncertainty over the preservation of hard earned savings has prompted many of their citizens to swap government legal tender paper currencies for man’s historical default store of value—gold or precious metals. (flight to real value)

These signs of intensifying cumulative efforts worldwide to hoard gold seems to portend the return of gold as money.

But then again, gold as part of a reformed monetary architecture would mean a vastly reduced welfare state, a privilege which incumbent politicians everywhere would unlikely yield...until market forces prevail on them.

Interesting times indeed.