Here's a fascinating article about speculators snarfing up the Dinar unit in Iraq, in the hope that Iraq stabilises and recovers! Of course, Iraq could collapse and burn, in which case so do these speculators' holdings.
Thus, we have an indicator. If the best guess of what people on the ground in Iraq think is stabilsation, the price of old dinar goes up. If collapse is imminent, watch it crash. This is what prices are for, said F.A. Hayek.
Dinar Brokers Boom in Iraq Chaos
By Joanna Glasner
02:00 AM Aug. 17, 2004 PT
From the safety of a computer terminal halfway around the world from battle-weary Baghdad, Bill Burbank is betting that political and economic stability will reign in Iraq some day in the not-too-distant future.
He has a lot riding on that hypothesis. Since October, when Iraq began circulating a new currency to replace its old bills, most of which contained images of Saddam Hussein, Burbank has spent close to $200,000 buying up new Iraqi dinar bills. Through a website based in Alpharetta, Georgia, the day trader and former Navy Seal runs a side business selling the new currency to the public.
"It's just so cheap at a tenth of a penny (per dinar)," he said. "If it just goes to a penny you make a thousand percent. I think there's not too much downside in owning the currency and just holding."
While most are betting far more modest sums on the hopes of economic recovery in Iraq, droves of investors are following a similar logic in buying up dinars. In response, a host of websites have cropped up to cash in on demand, most selling the currency at a steep markup.
Enter the phrase "buy dinar" into a search engine, and the results contain more than a dozen online outlets, most based in the United States, that are willing to sell freshly minted bills. Rates range from about $1,000 to $1,300 for 1 million dinar.
Brokers' prices don't reflect Iraq Central Bank's published exchange rate, because street prices for dinar are usually substantially lower, according to Burbank. Demand for dinars surged in the run up to the June 30 handover of power from the U.S.-led Coalition Provisional Authority to the Iraqi interim government, said Marshall Donnerbauer, owner of the website Investindinar.com. During that period, he was selling around $20,000 worth of dinar a day. In the weeks following the handover, sales slowed to about $5,000 a day.
Donnerbauer says his biggest customers are U.S. soldiers and employees of Kellogg Brown & Root, a subsidiary of the contracting firm Halliburton that has a large workforce in Iraq.
"They are over there seeing the growth and believe that Iraq will be much better in the future," he said.
Still, no one's calling the dinar a risk-free investment. Given that the Iraqi dinar is not yet traded on major global currency exchanges, there's no guarantee that buyers of the bills will be able to easily sell them.
"This is an extremely speculative investment -- there's no question about that," said Richard Lyons, a finance professor at the University of California at Berkeley's Haas School of Business.
History does provide examples of economies and currencies rebounding in the wake of turmoil, such as Kuwait and the Kuwaiti dinar following the 1991 Gulf War and Germany and the Deutschmark following World War II.
However, Lyons noted, history is also replete with examples of currencies whose value deteriorated sharply in the wake of conflict. One case close to dinar investors' hearts is Iraq itself, which saw its currency's value fall apart following the 1991 Gulf War as international sanctions took effect and Saddam maintained his hold on power.
According to several online dinar sellers, the typical investors spend $1,000 or $2,000 to acquire Iraqi currency. In most cases, investors say they want a large enough holding to make a tidy profit if the currency soars, but not enough to bankrupt them if the dinar declines.
"I always advise people: 'Don't invest more than you can afford to lose,'" said Christine Anderson, operations manager for New-Iraqi- Dinar.com
In weighing whether buying dinars is a sensible move, Lyons believes investors need to consider political factors more than economic ones. Simply stated, if one believes the current chaos engulfing Iraq will eventually be replaced by a stable, effective government, then the dinar ought to be a good buy. If turmoil continues, even the vast reserves of oil under Iraq's sands probably won't be enough to prop up the dinar.
Another factor prospective buyers should consider, Lyons said, is whether the Iraqi government is likely to increase the money supply to pay for things it can't otherwise afford. If a vast quantity of new dinars enters the economy, it would devalue the existing stock.
Burbank, for his part, is exploring the possibility of adding the Iraqi dinar to one of several established, private networks for forex, or foreign currency trading. If people had a single place to both buy and sell dinars, he believes they'd be more comfortable investing in the currency.
Of course, such an idea has its drawbacks as well, at least for websites that sell dinars. If investors could buy the currency from an established bank or trading exchange, most of the upstart online dinar brokers would likely be out of business.
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