Gold as a foreign policy tool: US Government Bans Gold Sales to Iran

The US government overtly intervenes in the gold markets when it uses gold as a foreign policy tool.

From the Economic Times:

WASHINGTON: The United States is working to block sales of gold to Iranians in order to undermine their currency the rial and to step up pressure on Tehran over its nuclear program, officials said on Wednesday.

From July 1, the US will ban sales of gold by anyone to either the Iranian government or to Iranian citizens, a senior US Treasury official said. Washington has warned Iran's neighbors Turkey and the United Arab Emirates, key regional centers of the gold trade, to stop gold sales to Iran, said David Cohen, treasury under-secretary for terrorism and financial intelligence.

Embargoes and trade sanctions are acts of war. The US has been provoking Iran into a war ever since.

Yet the US government’s arbitrary ban gold sales are really an attack on the average Iranians whom has gravitated to gold and to bitcoins due to Iran’s simmering hyperinflation. 

This shows how ruthless governments are, in wanting to starve or sacrifice innocent civilians in order to serve the political (neocons) and economic (military industrial complex) interests of the powerful elites. 

And I don’t think gold has just been a foreign policy tool but a monetary signaling channel or central bank communications tool as well.

“Wall Street versus the world” attempts to impress upon the main street and the real economy that gold has lost its luster as inflation hedge. The Iranian ban seem to also suggest of the same. The same article quotes the above US official: (bold mine)

The move to block gold sales is part of the effort to further weaken the rial, he explained. "There's a tremendous demand for gold among private Iranian citizens, which in some respects is an indication of the success of our sanctions."

"They are dumping their rials to buy gold as a way to try to preserve their wealth. That is I think an indication that they recognize that the value of their currency is declining."

So from the political authority’s perspective, the ban on gold means that Iranians would have to revert to the rapidly diminishing value of the rial and die alongside with the decaying currency.

Nonetheless the average Iranians know better thus the “dumping their rials to buy gold as a way to try to preserve their wealth”. 

Gold, not an inflation hedge? Only in Wall Street.

 

Like all forms of prohibitions they are most likely to fail.

Aside from Gold, Iranians Discover the Bitcoin

Aside from gold, economic and financial sanctions against Iran, which has partly led to hyperinflation has spurred Iranians to use the virtual currency, Bitcoin.

From Businessweek Bloomberg,

Created in 2009 by a mysterious programmer named Satoshi Nakamoto, bitcoins behave a lot like any currency. Their value is determined by demand, and they can be used to buy stuff. Bitcoin transactions are encrypted and handled by a decentralized global network of tens of thousands of personal computers. Merchants around the world accept the currency, from a bakery in San Francisco to a dentist in Finland. Individuals who own bitcoins and wish to exchange them for physical currencies like euros or dollars can use exchange sites such as localbitcoins.com, a Finland-based site founded by Jeremias Kangas. “I believe that bitcoin is, or will be in the future, a very effective tool for individuals who want to avoid sanctions, currency restrictions, and high inflation in countries such as Iran,” Kangas wrote in an e-mail.

The advantage for Iranians is that bitcoins can be swapped for dollars that can then be kept outside the country. Another plus: Regulators can’t easily track the transactions, since bitcoins aren’t issued from a central server. Bitcoin users can conduct business on virtual private networks, which hide customers’ identities.

At online store coinDL.com, shoppers can use bitcoins to buy Beyond Matter, the latest album from Iranian artist Mohammad Rafigh. Anyone in the U.S. downloading songs, which fetch .039 bitcoins or 45¢ each, risks violating U.S. sanctions. That doesn’t bother Rafigh, who’s studying computer engineering as well as playing music. “Bitcoin is so interesting for me,” Rafigh wrote in an e-mail. “I wish the culture of using digital money spreads all over the world, because it does not have any dependency on anything like politics.” Rafigh has translated some bitcoin software into Farsi for his friends. “I love Iran, and if bitcoin is good for me, it can be good for more Iranians like me.”

Iranian-American bitcoin consultant Farzad Hashemi recently traveled to Tehran and talked up bitcoin to his friends. “They are instantly fascinated by it,” he says. “It’s a flash for them when they realize how it can solve their problems.” Iranians working or living abroad can send bitcoins to their families, who can use one of the online currency matchmaking services to find someone willing to exchange bitcoins for euros, rials, or dollars. Bitcoins are useful to Iranians wishing to move their money abroad, either to children studying in Europe or America or simply to stash cash in a safe place.

As the value of the rial plunges, many Iranians are trying to acquire foreign currencies. “We have no idea what will happen,” says Amir-Hossein Madani, who says he’s traded tens of millions of street market dollars in Tehran over the past two years. “These days prices change every 10 minutes.”

The uncertainty has led some Iranian software developers to ask clients to pay them in bitcoins. “Anyone with a computer is able to own, send, and receive them. You can be at an Internet cafe in Iran and managing a bitcoin account,” says Jon Matonis, a founding board member of the Bitcoin Foundation, a Seattle nonprofit that promotes the currency. The exchange rate in Iran is 332,910 rials per bitcoin. It isn’t known how many Iranians use bitcoins to skirt sanctions. According to localbitcoins’ Kangas, 32 people in Iran have contacted each other through his site.

This is another proof which shows that the world doesn’t exist in a vacuum. People respond to incentives brought about by changes in the environment and social policies.

Hyperinflation and financial restrictions have compelled Iranians to discover alternative methods of money through gold and now bitcoins.

More on Iran’s Hyperinflation, Venezuela Next?

Professor Steve Hanke has more on the developing hyperinflation in Iran. 

From Prof. Hanke’s 10 facts on Iran’s hyperinflation (Cato Institute) [bold original] 

1. Iran is experiencing an implied monthly inflation rate of 69.6%. For comparison, in the month before the sanctions took effect (June 2010), the monthly inflation rate was 0.698%. 

2.. Iran is experiencing an implied annual inflation rate of 196%. For comparison, in June 2010, the annual (year-over-year) inflation rate was 8.25%. 

3. The current monthly inflation rate implies a price-doubling time of 39.8 days. For certain goods, such as chicken, prices may be doubling at an even faster rate. 

4. The current inflation rate implies an equivalent daily inflation rate of 1.78%. Compare that to the United States, whose annual inflation rate is 1.69%. 

5. Since hyperinflation broke out, Iran’s estimated Hanke Misery Index score has skyrocketed from 106 (September 10^th) to 231 (October 2^nd).   See the accompanying chart.

6. Iran is the first country in the Middle East to experience hyperinflation.  It is the seventh Muslim country to experience hyperinflation. 

7. Iran’s Hyperinflation is the third hyperinflation episode of the 21^st century.  The first was Zimbabwe, in 2008. The second was North Korea, whose episode lasted from 2009-11. 

8. Since the sanctions first took effect, in July 2010, the rial has depreciated by 71.4%. In July 2010, the black-market IRR/USD rate was very close to the official rate of 10,000 IRR/USD. The last reported black-market exchange rate was 35,000 IRR/USD (October 2^nd). 

9. At the current monthly inflation rate, Iran’s hyperinflation ranks as the 48^th worst case of hyperinflation in history. Iran currently comes in just behind Armenia, which experienced a peak monthly inflation rate of 73.1%, in January 1992. 

10. The Iranian Rial is now the least-valued currency in the world (in nominal terms). In September 2012, the rial passed the Vietnamese dong, which currently has an exchange rate of 20,845 VND/USD.

To add, as I have repeatedly been saying—symptoms of hyperinflation have likewise been manifested or ventilated on the stock market. 

The public’s reaction to the destruction of a currency’s purchasing power has been to seek refuge through securities backed by real assets. 

Traditional financial metrics in a hyperinflation ravaged economy has hardly been a concern because “cash” is under fire. When half of what has been used for transactions or when the conditions of the domestic medium of exchange is being questioned by the markets, then this represents a dysfunctional economy. We don't use conventional measures on an abnormal situation.

Thus, under a hyperinflationary environment, hedges or the stampede for safety or preservation of savings against a run on the domestic currency prompts for what would look like a stock market boom 

The same dynamic seems apparent in Iran. The one year chart of Iran’s bellwether the TEDPIX at the Tehran’s Stock Exchange reveals of a 3-month spike as Iran segues into a hyperinflation mode. 

Over 5 years the TEDPIX has risen nearly twofold even as real GDP growth in constant dollars exhibits a stagnation.

Iran’s GDP at constant prices (Index Mundi). 

So monetary inflation brings about a parallel universe: rising stocks, stagnating economy.

And another important point: Iran’s experience shows that the emergence of hyperinflation has not been gradual but precipitate. Price inflations as manifestations of monetary disorder always appear suddenly and unexpectedly. 

People who vastly underestimate the current dynamics of price inflation, as a result of concerted inflationism by global central banks, may likely be surprised by price inflation’s impetuous appearance.

I believe that similar symptoms are being exhibited in Venezuela.

Yesterday, the Venezuela’s Caracas benchmark, the IBVC, zoomed by an eye popping 7.98%!! This adds to the amazing weekly gain of 30.98%, and for a year to date return of a whopping 244.78!!! (see chart above from Bloomberg)

Some suggests that this week’s Venezuelan presidential elections have been breathing life into the markets. 

Yet a huge 67% jump in the incumbent’s the socialist populist Hugo Chavez spending in August may have been instrumental in driving the frenzied boom in Venezuela’s stock markets.

This September Bloomberg article gives us a clue, 

Chavez’s August spending surge is swelling the budget deficit that will compel him to devalue the currency after the vote to bolster revenue from oil exports and shore up government finances, according to Barclays Plc and Bank of America Corp., which said in a report yesterday that spending grew 41 percent on an inflation-adjusted basis…

“The market is pricing in an imminent currency devaluation in 2013 regardless of who wins,” said Carlos Fuenmayor, the Miami-based chief executive officer of BancTrust & Co., an investment advisory firm

So Mr. Hanke may want to train his eyes on Venezuela, a likely candidate for the next Iran.

Hyperinflation in Iran

From Cato’s Steve Hanke:

Since the U.S. and E.U. first enacted sanctions against Iran, in 2010, the value of the Iranian rial (IRR) has plummeted, imposing untold misery on the Iranian people. When a currency collapses, you can be certain that other economic metrics are moving in a negative direction, too. Indeed, using new data from Iran’s foreign-exchange black market, I estimate that Iran’s monthly inflation rate has reached 69.6%. With a monthly inflation rate this high (over 50%), Iran is undoubtedly experiencing hyperinflation.

When President Obama signed the Comprehensive Iran Sanctions, Accountability, and Divestment Act, in July 2010, the official Iranian rial-U.S. dollar exchange rate was very close to the black-market rate. But, as the accompanying chart shows, the official and black-market rates have increasingly diverged since July 2010. This decline began to accelerate last month, when Iranians witnessed a dramatic 9.65% drop in the value of the rial, over the course of a single weekend (8-10 September 2012). The free-fall has continued since then. On 2 October 2012, the black-market exchange rate reached 35,000 IRR/USD – a rate which reflects a 65% decline in the rial, relative to the U.S. dollar.

The rial’s death spiral is wiping out the currency’s purchasing power. In consequence, Iran is now experiencing a devastating increase in prices – hyperinflation.  As Nicholas Krus and I document in our recent Cato Working Paper, World Hyperinflations, there have been 57 documented cases of hyperinflation in history, the most recent of which was North Korea’s 2009-11 hyperinflation. That said, North Korea’s hyperinflation did not come close to the magnitudes reached in the recent, second-highest hyperinflation in the world, that of Zimbabwe, in 2008, nor has Iran’s hyperinflation – at least not yet.

Since hyperinflation destroys the division of labor and causes social disorder, the risks of another Middle East war is looming large.

By the way, one can’t discount that the US economic warfare policies could contributing to Iran’s hyperinflation through the CIA’s surreptitious counterfeiting of the rial.