Iranians Buying Gold as "Safer Haven" Sanctions Hedge

CONCERNS OVER the impact of international sanctions are behind recent falls in the Iranian exchange rate, as people in Iran seek to diversify their holdings of domestic currency by Buying Gold and US Dollars, according to an economist at a leading Middle East bank.

The Iranian Rial hit an all-time low against the Dollar at the start of this week, following a move by the United States aimed at pressuring Iran into curbing its nuclear program. 

"Iranians are seeking safer havens in internationally traded currencies and gold as the country faces the prospect of dealing with tougher international sanctions," says Jarmo Kotilaine, chief economist at National Commercial Bank in Saudi Arabia.

On the last day of 2011, US president Barack Obama signed a law that denies any foreign bank that deals with the Central Bank of Iran from accessing the US financial system. Two days later the Rial fell to a record low of 17,800 to the Dollar.

The Rial's slide prompted Iran's central bank "to inject more foreign currency into the market"  in an attempt to stabilize the Rial, according to Iran's commerce minister Mehdi Ghazanfari, quoted by the official IRNA news agency. 

The Rial rose to hit 14,000 to the Dollar on Wednesday, although there were reports that some foreign exchange bureaux were refusing to deal at the official rate, with some simply choosing not to open.

Despite the timing of the intervention, the head of the country's central bank denied it was a response to US sanctions.

"I declare absolutely that the international sanctions have not created any economic problem for the country," Mahmoud Bahmani, governor of the Central Bank of Iran, said Tuesday.

"The enemies know that and are trying to create psychological tensions. But we won't play their game."

There are signs that Iran's authorities are growing increasingly concerned about the prospect of Iranians Buying Gold. Last November, the country's finance minister urged people against Buying Gold and US Dollars, while news website Asriran reports this week that the authorities have blocked access to mesghal.com, a popular website among Iranians looking to track prices for Buying Gold.

Iran's gold market is "substantial", according to gold industry information service Grendon International Research.

However, "its importance to the international gold market [was] largely unrecognized outside Iran until 2005," says a 2008 GIR publication, "as no research company had previously been able to investigate the market since the establishment of the Islamic Republic of Iran in 1979."

Estimates vary as to the scale of Iranian gold demand. In a 2006 article for the London Bullion Market Association's Alchemist publication, for example, GIR's Nigel Desebrock estimated that Iranian gold consumption 2004 was "at least 139 tonnes" – of which 118 tonnes was estimated to be accounted for by people Buying Gold jewelry.

"Gold jewelry is bought as an adornment," wrote Desebrock, "but the investment dimension is extremely important."

A more conservative estimate of Iranian gold jewelry consumption for that year comes from VM Group's Yellow Book, which estimated it at 45.6 tonnes. The most recent VM Group estimate of gold jewelry consumption in Iran is for 2010 at 34.4 tonnes – ahead of countries such as Germany, the UK, France and Spain.

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