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Introduced in circulation in 1931,
the Iraqi dinar has changed hands from even the
earliest days. Backed by British pounds to being pegged to the US dollar,
the currency has had its fair share of activity. However, now with the
Central Bank of Iraq issuing a new and stable currency, plenty of global
speculators are seeing an opportunity. Or is it? Since the 2003 fall of the
administration and the deposition of its ruler Saddam Hussein, the
Coalition Provisional Authority or the current transitional government has
issued new Iraqi dinar. Printed by De La Rue and
adding in modern anti-forgery techniques, the updated currency has been
revalued from as low as 4000 dinar per U.S.
dollar to as high as 980 dinars per dollar. This
wild swing is what speculators are looking to cash in on, sparking massive
amounts of scams on the internet and associated forums. Sites promising
wildly higher rates of exchange for the currency and guaranteed rates of
return are banking on the hope that once the market opens up for the Iraqi
currency, the exchange rate, much like that for the Chinese yuan, will explode higher. But is it all true?
The Attractive Investment
Why has the dinar
become so popular? It's the simple fact that many of us remember when the Kuwait dinar declined to a
valuation of 10 US cents after the invasion by Iraq. However, since January 5, 2003, the previous weighted currency basket peg was
switched to a higher valuation of 0.29963 dinar.
This translates into $3.34 per 1 dinar, the
world’s highest valued currency. Translating this into an exchange rate
transaction, a $10,000 initial investment around the Gulf War would yield
the investor a 3,240% rate of return of $334,000. The same expectations
loom over the Iraq economy. Rich in crude exports and likely to remain
under the guidance of the US, the country is expected to make a rebound and be
catapulted into the global economic arena. The improvement and expansion
are expected to be reflected in the underlying currency, creating instant
profits for the dinar speculator.
Virtually Worthless
Currency
However, the rumors and internet
ploys are not true. All that glitters may be gold, but it comes at a price.
The first barrier has to do with pricing. Formally introduced in October,
the new Iraqi dinar is virtually worthless,
trading at 1,460 dinars to $1. However, with the dinar still not on the international open market,
exchange rates for the currency vary widely. On the streets, the value of
the dinar can be as high as 1,500 dinar to the $1. Comparatively, the International
Monetary Fund has specified a fixed exchange rate of 1,449 at the Cental Bank of Iraq. The discrepancy goes as far as trading companies and
dealers, which handle the retail public, quoting amounts as different as
1,050 to 1,356 per $1. The differences in prices can contribute to an
unfairly priced market. Granted, the opportunity does exist. However, it
leads to a second concern, liquidity.
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Liquidity Is King
Unlike the widely accepted major and
emerging market currencies, trading the Iraqi dinar
has significant barriers. Attributed to the wide discrepancies in prices,
banks will not openly trade the dinar with the
public. Larger institutions are only able to obtain the stable 1,460 dinar to $1 exchange rate. This will leave the retail
trader to pick between the scant number of dealers
offering differing prices. In addition, dealers won't always buy back dinars in the market, rather
they only sell the currency to the market. U.S. banks, unfortunately won't transact in them either at
the retail level. As a result, the illiquidity or absence of true
transaction sources will leave the smaller retail investor holding the bag
when it's time to cash out of the currency.
Political Upheaval
Although under the guidance of the US, the majority of the political development has been
handed over to the new Iraqi government. This leaves a lot of leeway for
geopolitical event risk as insurgents continue to battle the current
administration in a land that is rife with civil war. The volatility will
be reflected in the currency as fluctuations on a speculative manner can
move prices all over the place. That's just considering one stable price
and not numerous different prices. In addition, time is a heavy
consideration. Although the power has been handed over to regional
government heads, the insurgence could take years to end before there is
stability. Ultimately, this will keep a majority of investors out of the
market until the country becomes grounded.
Internet Fraud
Last but not least, the dinars ordered on the internet may be the older
versions, considered useless on the market. Although the new dinars are difficult to counterfeit and pass off,
dealers and traders in the dinar have sometimes
replaced the old dinars, bought at extremely
cheap prices, with the new versions in hopes that the unknowing investors
won't pick up on the difference. In addition, older bills will also be
mixed into the ordered shipment, lowering the value of the overall amount.
In some cases, this will halve the value of the overall order, already
considering it a losing investment. Some dealers have even taken the money
and run away, not delivering on the ordered currency and leaving the
investor empty handed.
Conclusion
Although a highly rewarding
opportunity, attempting to buy Iraqi dinars on
the internet is a risky transaction. Call it straight out gambling. Nothing
is guaranteed and the risk reward ratio is low. This simple fact will
likely keep a majority of traders out of the market. As a result, with
varied prices, a handful of participants and plenty of fraud potential, the
dinar market is one that has numerous barriers
that will likely hang around for a while and attract only those that are
misinformed..
source: http://www.gocurrency.com/articles/iraqi-dinar.htm
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