2011-DEC-27
Following the US and European Union’s decision to tighten sanctions against Iran, the Iranian rial has started depreciating dramatically. Many Iranians fear that the rial will continue to lose value. Last week Iranian television showed images of people camping overnight at the doors of the national banks in order to recover their savings.Large sums of these savings are flowing into the US dollar and into gold.
The rial's downward trend started after the US and the European Union announced that they intended to boycott Iranian crude oil exports, in an effort to increase their pressure on Iran to abort its nuclear programme. The announcement of this boycott has caused upward pressure on crude oil prices. Some analysts think that oil prices will rise as high as $150 a barrel next year.
On December 20 the Iranian central bank stopped issuing gold coins. New gold orders will have to wait up to four months for delivery. The country's political leaders are anxious to stop the flight from the rial on the part of ordinary Iranians, and think that making it harder to acquire gold will stabilise the rial. The strong devaluation of the rial is leading to significant increases in the prices of import goods, and political tensions could intensify. According to the Iranian central bank’s website, last Friday the official exchange rate for the rial was of 11,000 rials per US dollar – a drop of more than 15% in just one month. Iranian citizens fear that their savings will suffer from further devaluation. Not surprisingly, many are looking to gold as a means of hedging against this currency risk. The rediscovery of gold and silver as „crisis assets“ has given rise to a bull market during the past ten years, which last September saw the gold price hitting a record high of $1,921.21 per troy ounce.
Images in Iranian television showed angry citizens camping in front of national banks, waiting to withdraw their savings. Due to the recent devaluation of the rial, the difference between the official exchange rate and the market rates has been growing. The gold purchasing restrictions initiated on December 20 have caused a flight to other assets such as the US dollar. Meanwhile, the inflation rate has been rapidly increasing, hitting a high of 19.8% at the end of November. According to official Iranian calculations, by March of next year, inflation will peak at 21.6%.
But these calculations are only valid if the economy does not crash – and there are signs pointing towards this possbility. Besides crude oil, Iran provides few other important goods or services to people in other countries. Due to its limited refinery capacities, the country depends on gas imports – despite being one of the world's largest crude exporting countries.
Tighter sanctions could have fatal consequences for the Iranian economy. Restrictions at the local gold markets will not avert Iranians from transferring their savings to gold. Instead, gold prices at the black markets are expected to rocket higher.
