Thursday, April 20, 2006

Iranian Gold Rush Highlights Escalating Tensions

Gareth Smyth, The Financial Times:
With the war of words over Iran’s nuclear programme escalating and the domestic economy stalling, Iranians are scrambling to buy gold coins, sending their value soaring by 32 per cent in the past two months.

“It’s unbelievable,” blazed a front page story in Etemad-e Meli, a reformist newspaper, earlier this week. “It seems no investment field is as safe.”

Gold coins are Iranians’ political hedge fund,” says Heydar Pourian, editor of Iqtisad Iran (Iran Economics), a monthly magazine. “We keep them at home and they make us feel secure.”

Commodity prices have risen worldwide over recent years partly in response to Middle East tensions centred on Iraq, but Iranians are now starting to feel they may be at the centre of a growing storm.

Hence the appeal of gold coins given as presents for weddings and new year; gold coins are a liquid and proven investment. And at 460,000 rials (about $41.50) a quarter, gold coin is within reach for all but the poorest Iranian.

By contrast, Iran’s largely state-owned banking sector offers limited services, while investors face inflation put officially at 14 per cent.

While deposits in state banks lost 1 per cent in real terms in the year to February 2006, gold coins gained 21 per cent.

“Buying gold coins reflects a lack of alternatives,” says Mr Pourian. Big investors may pull out of real estate and move their capital to Dubai. Smaller investors have fewer opportunities.”

Businessmen say the rush to gold reflects both growing tension over Iran’s atomic activities and the destabilising economic policies of fundamentalist president Mahmoud Ahmadi-Nejad, whose government took office last August.

The direction reverses the years of [president Mohammad] Khatami and increases the role of the state, especially in allocating resources,” says one. It’s more like communism than Islam, and makes you think some of them want a siege economy ready for war.” READ MORE

The government buzz-phrase is “directed lending”, through which banks shape lending policies to suit governmental priorities for regional development and agricultural self-sufficiency. State banks, already undercapitalised, face increasing demand after the president has made hundreds of loan promises, especially on high-profile provincial trips.

Lending rates have been cut to 16 per cent, with subsidised exceptions including farm loans at 9 per cent. The banks, already in confusion after the new government replaced seven heads of state banks, are facing calls from ministers and fundamentalist parliamentary deputies for further reductions.

Lower lending rates mean lower returns for small depositors such as pensioners who, already wary of inflation, are among those fuelling rising demand for gold coins.

One of the first acts of the Islamic Republic after the 1979 revolution was to issue Bahar-e Azadi (spring of liberty) gold coins.