In Alternative Investments for an Increasingly Volatile Stock Market, we discussed foreign currencies – particularly exotic currencies – as an alternative investment for the next bear market in stocks. In that context, the Iraqi Dinar is a particularly attractive alternative investment
Alternative investments are the types of assets that tend to perform poorly when conventional investments, like stocks and bonds, are particularly strong. But during bear markets, alternative investments often spring to life, and attract the attention of mainstream investors.
There are several compelling reasons for the Iraqi Dinar as an alternative investment. Given the current uncertain environment in stocks and bonds, now is an excellent time to investigate alternatives.
CURRENCIES ARE A POLITICAL DIVERSIFICATION
Just as stocks represent the companies that issue them, currencies are representative of the countries that issue them. From an investment standpoint, this can represent an important diversification. Just as you would want to diversify your investments among different asset classes, you can also think of currencies as an asset class.
The difference between currencies and other asset classes is that their diversification is based on individual countries, or even groups of countries. That’s no less important for investment diversification than investing money in different asset classes or investment sectors.
Though some economic crises are global in scope, most are more country specific. For example, a severe recession in the US might result in only mild recessions in Japan and the European Union.
It’s also a fact that some countries may not be affected by recessions at all. For example, since Iraq’s primary international product is oil, and global demand for that commodity is fairly constant, the country’s economy could be relatively unaffected by a global meltdown.
That doesn’t mean that the Iraqi Dinar would explode in value in the strict sense. But since all currencies are valued against one another, the Dinar could rise in relative value compared to other currencies, like the dollar, the euro, and the yen.
IRAQ’S LITERAL “ACE IN THE HOLE”: OIL
One of the factors that makes the Iraqi Dinar almost unique among exotic currencies is that it is issued by one of the most oil-rich countries on the planet. This gives the currency potential value well beyond surface factors.
Iraq is the world’s fourth leading oil producing nation, after the Russia, Saudi Arabia, and the United States. It produces 4.38 million barrels of oil per day, and is one of the world’s leading oil exporting nations.
Iraq also has the world’s fifth largest oil reserves, trailing only Venezuela, Saudi Arabia, Canada and Iran. Its oil reserves are estimated at 142.5 billion barrels.
Oil is significant in connection with global financial instability, because the price of oil often rises during times of crisis. This is sometimes caused by currency disturbances, but often by wars, revolutions, and the rise of radical elements.
Were any of these events to take place in a major oil-producing region of the world, the price of oil can skyrocket. As it does, Iraq’s economic fortunes could improve – literally overnight – also raising the value of the Iraqi Dinar.
For example, were civil war to break out in Iran or Saudi Arabia, world oil supplies would tighten almost immediately. Should the conflict drag on for months or years, the effect on the price of oil could be long-term.
As oil from the directly affected country slows, other producing nations like Iraq, would be counted on to make up for the lost supplies. Iraq’s huge oil reserves, and strong Western influences, make that outcome highly possible.
In this way, oil, the Iraqi economy, in the Iraqi Dinar, could increase despite a global financial meltdown. In every global crisis, there are winners and losers. Iraq’s huge oil reserves make the country a potential winner.
THE IRAQI DINAR IS LIKE A SERIOUSLY UNDERVALUED STOCK
The Iraqi Dinar is currently trading at about 1185 per US Dollar. It’s been trading in that range for a very long time. Priced in US dollars, it’s worth less than 1/10 of a penny.
At that valuation, the Iraqi Dinar is close to worthless, practically speaking.
That may seem like a major negative on the surface, and it certainly is at the present time. But it can also be a long-term positive.
The Iraqi Dinar is so low in value, it has virtually has nowhere to go but up. Its value reflects a country that has no future. But because of Iraq’s immense oil wealth, we know that isn’t true. Despite more than 40 years of recognizing the need to reduce dependence on oil, the industrialized nations of the world remain seriously dependent on the commodity.
While it’s true that alternative energy sources, like wind and solar, have made considerable progress in the past couple of decades, they’re mostly being used for electric power generation. That mostly replaces the use of coal and nuclear fuel, since those are the primary energy sources used to generate electric power.
But oil’s critical role is in transportation. It’s high density and portability make it virtually indispensable for use in powering automobiles, ships and aircraft. There’s virtually no replacement for oil in transportation, either now or on the horizon.
As developing countries in the world continue to advance, and their populations acquire more automobiles and make greater use of air transportation, demand for oil will steadily increase.
With Iraq’s currency currently being close to worthless, it hardly reflects the fortunes of the country that has a disproportionate share of the world’s most important commodity.
The very low valuation means that speculation has been virtually flushed out of the currency. Purchasing it is therefore very low risk. But if any of the events described above play out, the currency value can skyrocket.
IRAQ’S FORTUNES CAN ONLY IMPROVE
Much like its currency, Iraq’s economy and political situation can only improve. The country is being virtually discounted by major players, which means the country is virtually “underpriced”.
Apart from a serious reversal in current oil fortunes, any signs of increasing political stability or economic growth in the country will improve the country’s fortunes, even apart from oil. When that happens, the Iraqi Dinar can go on a path of steady improvement. It sometimes forgotten that until the Gulf War in 1991, the Iraqi Dinar was one of the stronger currencies in the world among non-industrialized nations.
A simple return to normalcy could restore that status. Given that the country’s political fractures are benefiting no one, the country will eventually settle internal differences, and submit to a workable confederation.
There’s also the labor arbitrage factor. As globalization has slowly but relentlessly swept around the planet, large companies have been moving production out of countries where wages are high, and into those where they are low.
Though it has been gradually declining in recent years, Iraq’s unemployment rate remains uncomfortably high at 14.8%. The large number of unemployed workers has naturally suppressed wages in the country. This is bad news for Iraqi workers, but represents an attractive labor pool for large global companies.
This is another example of how Iraq is underpriced compared to the rest of the world. Wages are already rising in many developing – or formally developing – countries. As they do, previously untapped labor pools, in countries like Iraq, become more attractive.
It’s often forgotten that current industrial powerhouses, like South Korea and Taiwan, industrialized precisely because they offered low wages. As wages rise in more countries, Iraq stands to gain from a surge in employment.
HOW BEST TO INVEST IN IRAQI DINAR
If you’re convinced that the Iraqi Dinar is a worthwhile alternative investment, you can take a position right here at Treasury Vault.
We recommend that you hold a very small slice of your portfolio in exotic currencies, like the Iraqi Dinar.
Most of your money should be invested in conventional assets, like stocks, bonds, real estate, and interest-bearing cash equivalents. But it’s a solid investment strategy to diversify at least 10% or 15% of your portfolio into alternative investments. This can include primarily precious metals, like gold and silver, and a small position in exotic currencies.
The addition of the alternative investments should provide you with portfolio protection in the event of a prolonged bear market in stocks, or a highly disruptive global financial meltdown.
An exotic currency, like Iraqi Dinar, carries very low downside risk – due to its already very low exchange rate – but tremendous upside potential. With the right combination of circumstances – the kind that often accompany global disturbances – the Iraqi Dinar could return ten or 20 times your original investment.
Speculation? Sure. But some speculations are too good to pass up.