Wednesday, October 19, 2005

Stupid currency tricks: Iraqi dinar

I'm considering buying Iraqi currency as an investment.
Is that a good idea?

August 10, 2004: 10:13 AM EDT By Walter Updegrave, CNN/Money contributing columnist

Judging by the number of pitches I see from Web sites flogging the new Iraqi currency, not to mention dozens of people on eBay, there are at least some people out there who think investing in the Iraqi dinar that was introduced last October makes sense.

My take is unequivocal. Given the difficulty of predicting currency movements, I'm not even a big proponent of investing in established currencies like the euro or the yen.

And when it comes to buying and selling the fledgling currency of a fledgling government in one of the most chaotic parts of the world, that goes beyond mere speculation. I'd call it gambling.

The main argument for buying the dinar, of course, is that Iraq has vast oil and natural gas reserves at a time when energy prices are climbing. If the country gets its political act together, it could profit in a big way.

I hope things work out that way, but it's a big, big if.
And even if it does, there's no guarantee it will be able to run an economy that keeps inflation -- a major risk for currency values -- under control.

Of course, where there's great risk and uncertainty, there's also the potential for great reward. But I'd be wary of some of the information out there.

One site I visited had a chart showing the historical value of the dinar from 1932 through 1982 fluctuating between just under $5 and just under $3 per dinar. Gee, the dinar is now worth only $0.0007. Could you imagine if it made it back anywhere close to its historical range? Why you'd make a killing! Even if the dinar climbed in value to just one cent, that would represent a 1,329% return!!! Surely, it can go up at least a penny.

Really? If that's a sane rationale for investing in a currency, then why not buy the Turkish lira, which trades at $0.0000007?

Fact is, it's the economic prospects for a country that determine the future value of its currency, not the price it trades at now or the price it traded at in the past. And no matter how low a value a currency reaches, it can always go lower.

One final thing to consider if you're still thinking about investing in dinars is liquidity.

At this point, there's not a particularly organized market for them. You can get an exchange quote for dinars by going to the currency section of Bloomberg or Yahoo Finance, but the rate you'll pay varies substantially from one seller to the next.

As for selling any dinars you buy, good luck.

Frank Trotter, an executive with Everbank, the online bank that offers small investors savings and money-market accounts denominated in a variety of foreign currencies (but not Iraqi dinars) told me that his trading desk surveyed several of the online dealers posing as someone who owned dinars and wanted to sell them.

"We received no bids," said Trotter. "We haven't seen a legitimate market in terms of trading it."

That could change, of course, but probably only if the political and economic situation stabilizes. So if you want to sell dinars, for now you're pretty much relegated to eBay.

My view is that if you want to spend a few bucks to acquire Iraqi dinar as a novelty item or you want to gamble with money you can well afford to lose, that's fine. Enjoy yourself. But you shouldn't even think of making something this iffy a part of your investment portfolio.

Walter Updegrave is a senior editor at MONEY Magazine and is the author of "We're Not in Kansas Anymore: Strategies for Retiring Rich in a Totally Changed World."


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