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FEATURE-They’re buying what? US investors latch onto Iraqi dinar

by on November 15, 2012 9:35 pm BST
 

NEW YORK |
Thu Nov 15, 2012 4:35pm EST

Nov 15 (Reuters) – The U.S. stock market almost
wiped out his retirement account, but retired pilot Ronald
Scarpa hasn’t lost his taste for risk. Lately he has turned to
one of the chanciest investments in the world – the Iraqi dinar.

“It’s not a question of if, but when Iraq revalues its
currency,” said the Las Vegas-based Scarpa, who keeps dinars in
his retirement account. “The dinar will eventually have
substantial value, possibly the highest in the world.”

He’s not alone in risking his money on an investment that
can charitably be described as a long-term turnaround project
that will pay off only for the extremely patient. Thousands like
Scarpa in America are buying the dinar, hoping someday the
war-torn nation can revalue a currency worth just a fraction of
a penny.

The fundamentals for buying the dinar are precarious. The
United States invaded the country in 2003 and has only recently
removed most of its troops. The country’s political situation
remains unstable, and destabilization in the Middle East – most
recently with rockets fired between Israel and the Gaza Strip –
could undermine the fledgling republic further.

U.S. retail investors’ interest in Iraq’s currency is part
of a broad push for investment opportunities that will give some
yield. Most of them cite near-zero interest on their U.S.
savings and certificates of deposits as a reason for buying
dinars and other exotic currencies.

The dinar, worth just a tenth of one U.S. cent, is
experiencing additional downward pressure as a result of
international economic sanctions imposed on neighboring Iran and
Syria.

Also, buying the dinar is a task in and of itself. The
currency is only traded in Iraq, so it can only be purchased by
U.S. customers through a handful of dealers around the U.S. who
get their dinars from Iraqi banks. If a customer wants to sell
his dinars, the dealer will only buy it back at a 30 percent
discount – so no quick trades here.

But Scarpa said he is prepared to wait. The country has the
second-largest oil reserves in the Middle East and exports 3.4
million barrels of oil per day, making it one of the world’s
largest oil producers.

“If the dinar rises to just even a penny, you would have
realized a profit of 900 percent,” Scarpa said.

WEAK CURRENCY BRINGS IN SPECULATORS

In the last four years, the dinar has barely moved. Since
2008, it has appreciated by just 5 percent against the dollar,
and at a tenth of a penny, the Iraqi dinar is the weakest
currency among oil-producing Arab nations.

The Kuwaiti dinar is worth about $3.50, while Saudi
Arabia’s riyal is equivalent to roughly 26 U.S. cents.

The old dinar was worth $3.20 before the United Nations
embargo that followed Iraq’s invasion of Kuwait in 1990. By
August 2002, the dinar had plummeted to a fraction of a penny.

Speculators are betting that given Iraq’s potential as an
oil-driven economy, the dinar could rise to a value of $1 to $3.

“I looked at the risks and I decided that this is not going
to bankrupt me,” said 35-year-old Ryan Williams, a former
sheriff in Bakersfield, California.

“You invest a couple of hundreds or a couple of thousands of
dollars and even if it just appreciated by 10 to 15 percent a
year, that’s still a lot better than investing in certificates
of deposits here.”

The Iraqi central bank sells dollars daily at a fixed price
of 1,166 dinars through two state-run financial institutions and
some private lenders Those institutions set the market rate
through sales to customers. The current market rate is 1,215
dinars to one U.S. dollar.

Hassnain Ali Agha, founder of Las Vegas-based currency
dealer Dinar Trade, is the biggest U.S. market-maker in Iraq’s
currency. He also sells other exotic currencies such as
Afghanistan’s afghani and the Libyan pound.

The United States is a huge market for Agha’s firm, which
has nearly 900,000 customers, 90 percent of which have purchased
dinars. His customers are U.S. mom-and-pop investors – teachers,
police officers, and construction workers. He also sold dinars
to many U.S. soldiers coming back from Iraq.

Agha, who formerly traded at the Chicago Mercantile Exchange
and New York Futures Exchange, himself holds more than $2
million in dinars, he said.

In 2011, Agha said, his firm sold about $577 million in
dinars to U.S. customers, most of whom hold dinars for
investment purposes.

“People in the U.S. really feel that Iraq is the next
frontier market to make money on,” said Agha. “There will come a
time when the Iraqi government will have to adjust the dinar
exchange rate given the country’s oil exports. That will start
fueling the fire.”

Agha sells dinars in 1 million lots for $1,120. For the U.S.
investor, however, it has to be a long-term holding. Dinar Trade
will buy Iraqi notes at $850 per million, so the dinar would
have to appreciate by about 30 percent before an investor could
sell and break even.

IRAQIS WANT DOLLARS

In Iraq, prices are quoted both in dinars and dollars, but
many prefer the greenback, locals interviewed by Reuters said.

Saja Majeed, a 30-year-old civil servant in Baghdad and a
mother of two, said she carries dollars in her wallet because it
is safer and she sees little opportunity for the dinar to rise.

“There is no industry in Iraq except oil. The dinar is
linked to oil, but oil will run out one day,” Majeed said.

Revaluation will only happen once the Iraqi government
stabilizes. Iraq’s central bank hopes to make one dinar equal to
$1 at some point through redenomination and central bank-induced
appreciation.

Iraq’s deputy central bank governor Mudher Kasim told
Reuters that process could take three years.

America investors are remaining patient.

“The big question is: where do you put your money in the
U.S.? You can’t get any interest in your money. Banks give you
almost nothing on deposits,” said Donna Simko, a real estate
agent in her mid-sixties in Riverside, California.

“The gold rush into Iraq is just getting started.”