July 6, 2011 / 6:42 PM / 6 years ago

Iranians go for gold amid inflation and currency fears

7 Min Read

<p>A man looks at Iranian gold coins as he leaves a currency exchange shop in Tehran's business district July 5, 2011.Morteza Nikoubazl</p>

TEHRAN (Reuters) - Leafing through an old family photo album, 74-year-old Molook Amini wished she could afford to buy a gold coin as a wedding gift for her youngest grandchild as did for others.

"It was always a tradition to give gold coins to close family members on special occasions. This year for the first time I cannot afford to do it anymore."

Whether for wedding gifts or as a way to squirrel away savings, Iranians have a long history of buying gold coins, widely available from dealers in high street shops and bazaars. But recently, what was a steady demand has become a gold rush.

Amid global economic uncertainty, the price of gold on world markets rose steadily in the first half of 2011 and Iranian coins appreciated in line with that. Rather than cashing in their coins for a profit, Iranians continued to buy them in ever larger numbers.

"Usually, as the price of an item increases, demand will decrease. But in the case of gold, it seems that higher prices are creating more demand," said a gold retailer in Tehran who asked not to be identified.

The Iranian gold rush was mainly driven by fears about the domestic economy, particularly the risk of soaring inflation and a wobbly currency, he said.

In addition to concerns about a global double-dip recession, the economy has been hit by sanctions as the United States leads global pressure on Tehran over a nuclear program many states say is aimed at building atomic weapons, a charge Iran denies.

"The reasons that people are drawn to these safe assets -- gold coins and hard currency -- are firstly a limited choice of investment opportunities, and secondly a fear from the weakness of the national currency," said an economist who asked not to be named.

"These are results of more potential economic instability in the country."

King and Clerics

Treasured as a store of value, Iran's gold coins, minted over centuries, are also culturally important.

They were traditionally stamped with the faces of kings. After the 1979 revolution, the Islamic Republic started to issue Bahar-e Azadi (Spring of Liberty) coins, some of which were engraved with the image of Ayatollah Ruhollah Khomeini, who led the uprising against the last shah.

Produced by the Central Bank of Iran, a standard gold coin weighs 8.133 grams. It is also sold in smaller denominations of a half coin and a quarter coin.

In June the price of a Bahar-e Azadi gold coin reached an all-time high at around 4,550,000 rials (263.91 pounds), compared to a year ago when it sold for around 3,120,000 rials.

Iranian authorities have repeatedly denied that sanctions are hurting the country, saying the economy is strong.

But many Iranians are worried that keeping their wealth in rials is a risk.

"We can keep the coins at home and feel secure," said Mohammad, a 39-year-old stock trader who said financial sanctions have made it harder for normal Iranians to transfer capital abroad, for example to buy property in Dubai or Europe.

"In the current situation there are people who can move their capital and invest in other countries, but we as ordinary people have no choice but to invest in gold coins," he said.

Inflation and Devaluation

Saving rials is also less attractive than a few months ago after the government reduced the level of interest banks could pay on savings. Returns were slashed in April from a range of 26-28 percent to 14-17 percent, below what many Iranians believe to be the actual inflation rate.

Worries about the declining buying power of the rial and doubts over the currency's stability are the main drivers behind the flight to gold.

While the International Monetary Fund has praised Iran for reducing inflation to 12.4 percent for 2010-11 from 25.4 percent two years earlier, the rate has been creeping back up over the last year to 14.2 percent in May. Prices have risen much faster for key items such as fuel, water and food as heavy government subsidies are phased out.

At the end of last year, President Mahmoud Ahmadinejad started winding down some $100 billion of subsidies and giving direct cash payments to families to reduce the impact of price rises. The switch, praised by the IMF, was done despite the predictions that surges in the prices of fuel, food and water could stoke wider inflation.

As well as hoarding gold, many Iranians sought to change their rials into hard currency, increasing demand for dollars so much that the Central Bank devalued the rial by almost 11 percent last month.

That sudden decision did nothing to assuage Iranians' fears about the safety of their savings.

Many economists believe the rial, which is loosely pegged to major world currencies under a "managed floating exchange rate," has not been allowed to devalue in line with inflation and is overvalued by between 30 and 50 percent.

As international trade in rials is very limited, the change in its value has no real impact on global markets.

It sank to 12,500 to the dollar last month, compared to 10,500 earlier in the year.

Since the devaluation, Central Bank governor Mahmoud Bahmani has said he might use a raft of policies to prevent the rial falling further, including possibly restricting the activities of money traders he accuses of profiteering and speculation.

He also said Iran would reverse the bank interest rate decision. "We will curb the fake demand for foreign currency by increasing interest rates," the daily Arman quoted Bahmani as saying in June.

Following central bank intervention, injecting hard currency and gold into the market, the price of both the dollar and of gold coins has eased.

But analysts say fundamental problems will continue to pressure both and have criticised what they say are contradictory signals from the government.

Bahmani said the rial will recover to a "market rate" of 10,000 rials and the price of gold will decline.

But such comments, immediately after a devaluation which put the official dollar rate at 11,717 rials, have only added to the uncertainty, some economists say.

"Signs of confusion over forex policymaking are very apparent. The sudden increase (in the dollar) followed by a drop and the announcement of various rates for currency by different finance officials is indicative of that," the economic daily Abrar-e Eqtesadi, wrote on July 3.

Ordinary Iranians are far from reassured.

"During these times of instability in Iran, the safest form of investment is gold coins because no-one knows how much the rial will decline or interest rates will be," said 30 year-old private sector employee Saba Aqabala.

Back in her apartment in northern Tehran, Grandma Molook hopes she might still find the money to buy her granddaughter the gold coins. "I'm afraid I'll have to buy her a household appliance," she said. "Or just give her the cash."

editing by Paul Taylor

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