I had read en passant a short news byte last week on some sort of unrest in Iran, but at the time I couldn't dive into it. Today I stumbled upon an amazing thread at the Kitco fora: a frightened, but courageous, civil engineer called Iman accounts in the first person the rapid deterioration of the Iranian government's lid on its currency. What is happening in Iran is not just social unrest, nor just a run on banks, it is something way more serious.
Update 28-12-2011 : The situation continues to develop at fast pace. Today the press in Europe and the US finally decided to pay attention to the situation after menaces from the Iranian government to block the passage of oil tankers through the strait of Hormuz, in case the White House signs the new round of sanctions. This shows that the Iranian government fears indeed the sanctions; part of Iran's daily Oil output may not have buyers in case they come into place. Is it just bluff, or is Iran readying itself for armed conflict? The internal economic turmoil is designing a desperate situation for the Iranian government. In desperate situations desperate actions can easily take place.
The increasing isolation of the country in face of tightening economic sanctions from the exterior has halved the value of the Iranian currency, the Rial (I can't check it right now but this word likely has an origin in Portuguese). Feeling the rapid loss of purchasing power Iranians started flocking into the dollar and the euro. Apparently they exhausted (or menaced comfortable levels of) available reserves of foreign currency and the Central Bank was forced to its last resort: sell its gold reserves. Once these news got known folk piled up at banks to get the little gold they could.
This is a sad example of John Keynes' classical liquidity run. Portfolios move violently towards liquidity, even hard assets like land aren't spared, it's pure panic. The notable character of this liquidity run is that portfolios kept moving towards ever more liquidity, not stopping at local paper, nor at foreign currency, investors only feel safe with the ultimate liquidity: gold. It is a total loss of confidence on Institutions and the realization that greenbacks are easy to falsify in the black market.
In a few hours the unthinkable happens: the Central Bank closes shop and gold goes into backwardation. On the streets of Iran gold is more expensive than at international exchanges, more expensive than the official rates set by the Central Bank the day before, more expensive than the 4 month futures the Central Bank promises. This is the last place where a government and/or central bank wants to be, they are forced to intervene directly into the black market, but in reality they lost control of the situation, monetary policy is no longer possible.
Going forward this liquidity run will trigger a huge slowdown in economic activity and puts at risk foreign trade. From here to empty shelves, even if partially, can be a small step. Although Iman reiterates the unlikelihood of civil demonstrations, mimicking recent events in arab countries, the social impact will be huge, migrations to nearby countries are a possibility.
In reality Iran has plenty of hard currency under its soil in the form of Oil and Gas. For decades the country has exchanged this currency for food, finished goods and abstract currency reserves. The hardening of sanctions by the US, likely to be followed by other large economies, will make it much more difficult for Iran to trade its energy, for those who may dare to accepted it shall get sanctioned too. In face of such perspective this energy currency lost its value, dragging with it the abstract Rial and the Iranian economy.
But the energy flows coming out of Iran are not really replaceable, especially in the Far East, it may eventually find alternative buyers for its hydro-carbons; some countries out of the sphere of influence of the US and EU may opt to shift their trade from other oil exporters to Iran, perhaps profiting from direct exchanges of energy for food and goods. In case a scheme like this doesn't unfold Iran can be in for a very critical moment in its history and so the international Oil market.
As a closing thought I'd like to stress that this situation is a very likely scenario in case a state like Greece or Portugal decides to leave the EU at this stage. The main difference is that these states don't have Oil or Gas.
Best hopes for Iman and his folk.
Excerpts from a thread diary by Iman
12-18-2011, 05:32 AM
Tens of thousands pile into Iran National bank across different cities to buy gold government announced 40 tons of gold has been sold till the moment, our currency is going to end (40% deflected against us Dollar this year) like the other aspects of our loving country.
12-18-2011, 07:16 AM
It seems that our Central bank has run out of Dollar and people are aware of that.
officially there is 20% of inflation here but the CPI is more than 50% as I paid by Rial (not Dollar) this year I can buy just less than half of what I could buy last year!!
Finally Iranian aren’t dare enough (especially comparing of Arabs) don’t expect for any uprising here
12-18-2011, 07:27 AM
here people sleep one night in front of the bank !!
you have to wait 20 hours to buy 40 grams of gold
12-18-2011, 10:14 AM
I think It’s absolutely due to economical problems not war central bank sells gold to balance gold price but it doesn't work and attracts more people to queue!! If President Obama signs the Central Bank Sanction I couldn't imagine what would happen here
People don’t want Paper money thousand by thousand they change their properties to Dollar and gold coins/bars.
12-18-2011, 02:29 PM
Honestly I’m scared about next year like many other Iranian. our economy is gonna collapse. If we can’t sell oil or can’t get the money of our oil surely there would be many difficulties. Many peoples learnt the severity of this situation that and rushed to banks to buy gold. People sell all the cashable stuffs like stocks, land and other properties to buy gold.
12-19-2011, 01:26 PM
[The Central Bank has sold] 40 tons in six months but the rush in these days may force them to sell more tons
I’m sure they're lying they've run out of gold
Current blackmarket rate for the rial/dollar:
Yesterday 14000 Rial=1$
Today 14500=1$ the greatest jump in past ten years
Official coin today 5800000 Rial
Street coin price today 6050000 Rial
There is a breaking news:
CB of Iran Stop Selling Gold Coin it announced that buyer get coin after next 4months very bad signal to market
it seems they are hopeless of controlling the market
12-19-2011, 02:21 PM
our TV doesn't say that in news but everyone learned it from Internet.
there are many reasons trigger this rush:
1) sanctions of CBI
2) selling gold by bank(which stopped today after 9 months) shows they need money!!
3) CPI near 50 % inflation near 20%
tonight after work time when I take a taxi to back home he said me to give him 3500 rial instead of 3000 I surprised (I remembered the Zimbabwe)
I told him I don't print the money Get your extra 500 Rials from CBI!! who print the money continuously
4) and the most important : losing confidence to economical policies of government especially our central bank chief DR. Mahmoud Bahmani
12-21-2011, 05:12 AM
After stopping of gold selling by banks coin price skyrockets from 6080000 to 6250000 Rials
1 Gold coin= 6250000
1 us dollar =15600!!! It’s still unbelievable
Coin price in the morning jumped to 6250000 Rials while in the afternoon it back down to 610000 Rials
12-21-2011, 02:15 PM
Us dollar price in the morning jumped to 15800 Rials while in the afternoon it back down to 15000 Rials (I never had seen such a big swing in the price)
Central bank tried to beat the market severely by huge asset selling they’ve sold:
1) Tons of gold coin in the street market to calm down the price rise.
2) Millions of dollars in the street market to calm down the price rise.
3) They opened thousands of future sell contract in merchandise marked to beat the bid future queues there
4) They start future selling of gold coin in price of 5670000 (to be delivered to buyers next four months) in Melli Bank branches
12-21-2011, 04:29 PM
price raised from 5800000 to 6250000 in past 5 days near 8% raise while comex gold was down
12-25-2011, 12:25 PM
The first analysis of future selling gold coin in banks:
Equal to 5 tons have been sold in past4 days!!!
No one can stop Iranians from buying gold Coin
each house has already becoming like a central bank treasury it may not be safe like this.
Today Market Price:
Gold Coin Price: 6150000 Rials 2% rise
1 US $ = 14950 Rials 5.5% rise !!
Police attacked to US dollar seller-buyer on street market today morning