There have been a few times in my life when I had a gut feeling about money. In high school, gold fell below $300 an ounce. My gut told me that $300 was a psychological floor and gold would not stay that low for long. Within two years, gold was selling for $500 an ounce. I felt the same way when oil fell to $10 a barrel twenty years ago; the price doubled in just a few years and went up almost 10-fold in 15 years.
Oil and gold both had something in common: demand - and lots of it. That meant that I could explain my gut feeling using facts and considering demand. It is much more difficult to get gut feelings about foreign currencies. Sure, people can and do bet on currencies and invest in them. The performance of a currency depends on the performance of the economy backing it, as well as the performance of your home currency.
Why all this background information? Because there is a potential scam permeating its way through public safety, and some of our brothers and sisters are biting on it. I have heard of a sudden interest in buying and holding new Iraqi dinars, the currency of Iraq, as an investment.
Making Money on Money
Can you make money by buying another country's currency and holding it for a period of time? The answer is, absolutely. However, there are a few issues that you must understand when it comes to currency speculation. First, recognize that the banks that buy and sell foreign currency avoid losing money doing it. The banks buy currency in amounts that you and I cannot, so they get the market, or true, price for the currency. They make money by buying and selling currency at a spread, which is they sell you the money for a different price than they buy it. That difference, or spread, is their profit margin. So, if you buy a foreign currency, you are going to buy it for more than it is really worth. When you sell it, you actually get a price less than it is really worth.
Second, you have to understand what makes a currency increase or decrease in value. There are entire textbooks devoted to that topic. To help you understand how complicated currency pricing can be, here are just some of the issues that affect the value of a currency compared to the US dollar:
- US interest rates;
- The foreign nation's interest rates;
- US and foreign national debt;
- Exports and imports;
- Government stability;
- Economic potential of the foreign nation;
- Economic reality in the foreign nation;
- Current inflation/deflation;
- Anticipated inflation/deflation, and;
- Convertibility (how easy can it be exchanged) of the foreign currency.
As you can see, a number of issues influence the value of a currency against the US dollar. And this list isn't exhaustive.
Third, there are plenty of professionals in the currency speculation arena. They use sophisticated computer programs to search for momentary pricing advantages, buying and selling in huge quantities to take advantage of small price differences. Their jobs and livelihood depend on currency trading.
Is it a scam?
It probably isn't a scam in the traditional sense of the word. From what I can tell, the websites that sell Iraqi dinars actually deliver the dinars to you. So, in the sense that these dinar-promoting websites are trying to steal your money, it isn't really a scam. However, let's look at some of the details.
One website offers to sell you 1 million dinars at the bargain price of $1260. This same website will purchase 1 million dinars, uncirculated currency, for $1000. If the currency has been circulated, which may mean handled or may mean shipped to you, they will only pay $850. For you to make any money buying and selling dinars through this website, the value of the dinar has to increase 26% at a minimum (or almost 50% for circulated money). That is a big spread to recuperate before making any profit.
Consider the issue of actually selling these dinars. Obviously, a few websites would help you do this. Will those websites be here in a year or two when you want to sell? I don't know. After a little research, I found there are only four (yes, FOUR) banks in the USA that will convert dinars into dollars. Remember, convertibility affects the price of a currency. Low convertibility does not bode well for increasing value.
Look at some of the other issues on the list of what affects currency value. Government stability and economic potential might jump out at you if you are considering buying dinars. How stable is a government that needs 50,000 "non-combat" troops to support it? How long will the US troops stay there to support the government? How much oil does Iraq have and do they have the means to actually pump it, process it and sell it? What happens when there is no oil money, either because the infrastructure won't support it or green technology makes oil less valuable? My answer to all of these is, I don't know.
That's a lot of questions, a lot really difficult questions, and no answers. So what are the odds that you'll make money buying dinars? I don't know; but I'd say they aren't very good.
Here's the short version of all this. If you think you are as smart or smarter than professional currency traders, that Iraq is an economic powerhouse waiting to expand, that Iraq is the future economic center of the Middle East, then by all means buy. However, I see it as the exact opposite, which makes the currency a huge gamble, not a solid investment. If you want to gamble with some of your money and take a chance, go for it. But understand it is just that: a gamble. And as with most gambling, you can lose all of your money pretty fast.
That's my gut feeling on the Iraqi dinar; I hope it helps. Of course, I am not always right. Twelve years ago, I sold a silly little stock named Yahoo because the company didn't make anything and I thought there was no way it would survive... poor decision on my part, which is why I head off to work tonight.
But I head to work with no dinars in my pocket.