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Iraqi Dinar Buzz Updates

This post was provided by Steve Enorrste in response to Rudy Coenen’s position on the potential rate which was posted earlier this week and also posted again below this article….
2011-03-08 03:24:59

First, I agree that $.86 is a “nonsense” number. It is based upon taking three zeros off the current rate of .00086 dollars per dinar. Since we know that the “removal of the three zeros” has nothing to do with moving decimal points, this is a purely bogus number, logically speaking.

Second, which is the writer’s number 3 point, the $3.22 number does not come from thin air. In fact it is a number that has been mentioned specifically by the Ministry of Finance (they actually used $3.33) in 2007 when they stated that they had recommended to the CBI that this number be used. It was based on a “reinstatement” to a value that the IQD held PRIOR to the regime of Saddam Hussein. More importantly, in 2008 the CBI accepted this recommendation! This is all in my book, which is available for free on the website, under “downloads.”

Therefore, we have the CBI and the Ministry of Finance on record as far back as 2008 stating that it was THEIR intention to RI the currency to a rate of $3.33.

Since that time the CBI has continued to make statements that show that it is “on plan” to do exactly what it agreed with the MOF to do. These statements include the fact that the CBI has informed the public that it will drawn down the total money supply of the IQD from the maximum of 25 trillion dinars to 25 billion dinars, the money supply that existed in the early 1980s, when the value of the IQD was easily established and maintained at $3.33. As recently as July 2009 Shabibi said he had reduced the money supply by 70%. More recent estimates place that at about 85%.

We see, then, that this is an attempt to return to a position of stability from the past. Therefore, the argument of the reader in his fourth point does not hold water. The reason that it doesn’t hold water is related to his third point, in which he refers to the actions of “investors” in the IQD, presumably at the FOREX.

The issue here is quite simple, really: Iraq is not concerned about “investors” in its currency. It wants to RI the currency to a level that is commensurate with a time period PRIOR to the regime of Saddam Hussein.

Furthermore, no country, that I know of, bases its valuation decision for its currency on the potential profit to be made by an “investor”. This is simple logic. The FOREX is a zero sum game. It has no impact whatsoever on the value of a currency from within a given country.

In fact, that computation is made through a very complex process that now involves the IMF, which has about100 indicators of the “overall wealth” of a country, including its natural resources, manufacturing capacity, agricultural capacity, education of its people, number of its people, tourism, and so on. This is a very, very complex process, but is going to be the BASIS on which all currencies will eventually be evaluated. In short, currencies of the future (the near future, in my opinion) will be “backed” by these resources and therefore FIAT currencies will disappear.

Finally, then, we see that the CBI and the MOF have had a plan for several years to RV/RI to at least $3.33. In addition, in concert with the IMF, it is highly likely that a higher valuation will be REQUIRED based upon the resources of Iraq. As the writer to whom I am responding has so correctly noted, Iraq will almost certainly become a top player in the oil and gas market. Furthermore, with both the Tigris and Euphrates Rivers running through the center of the country (no other ME country has this asset), they will become the largest agricultural country in the mideast. In addition, being more “secular” than any other country in the ME they will have an advantage over these other countries in terms of pure competition (i.e., religion will not be a major factor: women can work!).

This, to me, seems to be not only supported by the CBI and MOF, but is also consistent with IMF intentions. When compared to an analysis based upon “logic” without anything to back it up, either by link or by a statement from the IMF itself, it seems to me that I am on firm ground. The rate of $3.33 will be the lowest entry point for Shabibi. Given the IMF stipulations, and the fact that 30 years of inflation have occurred since the early 1980s, I am confident that the opening shot will be in the $5.00 range.

 As an addendum, I will address the “investor” scenario, even though this has no part in the process of thinking of the Government of Iraq or the CBI or the MOF. The reality is that investing in foreign currencies is a zero sum game. For every winner there is a loser. The fact that Iraq comes out at $5 or thereabouts does not mean that it will collapse. It may mean that it will not be highly traded, since the upside potential may not be obvious. At the same time, however, it does not mean that it will crash, because, in my opinion, this is a “fair value” for the IQD. If I am correct, there will be roughly a similar number of people wanting to enter the market as those wishing to leave it at this level.

Here is the biggest issue to consider on this point: the IQD is NOT currently traded on the FOREX. Therefore, no one, and I repeat NO ONE, has an electronic position in the IQD on the FOREX. Given that statement, how much “selling force” could exist? I submit that the answer is simple: none. In short, there will either be no activity, or there will be buyers. Buyers will push the value upward, and, even though it will be slow (as Shabibi would naturally want), I have shown that the “true” value of the IQD could easily be supported at $11.00. I wrote that over a year ago. Today others are suggesting that $16.00 is more reasonable, given the “overall wealth” of Iraq.

I hope that this analysis is helpful and trust that you will expose it as appropriate.

The following is an excerpt from Rudy Coenen’s February 23rd interview with Dinar Daddy. I know that Steve (Enorrste) stated in his last post that “I have committed my mind to the belief that the rate will be $5.27 at the banks”. Steve, we’d love to get your feedback or rebuttal to Rudy’s resoning that the rate will fall somewhere between $1.75 and $2.12….(which I would be just fine with, by the way!!!

“I looked at a lot of reports last year and the month of February. The UN Development Group had a report in conjunction with the IMF – they came up with a nominal value of $1.14. That was before they realized they had discovered an extra 150 million barrels of extra reserve in oil in one of the fields. If we look at Iraq and look at all of the sectors that are going to have profitable growth – mfg, agriculture, its oil fields. Only 38% of Iraq has been explored. 62% of the country has not been explored. And once the oil companies that bought contracts start going out into areas of Iraq that have not been explored, I think we’ll find that Iraq will be the number one oil reserve in the world. We know now that they have the #3 reserve in natural gas. And the oil in Iraq is very easy to get to and it’s a very sweet crude, very easy to refine. So once we see all of this occurring….I have to say I think the rate is going to be anywhere between 1.75 and $2.12.

There are 4 ways of looking at this:

1) There are a group of people out there that say it can’t be any higher than .86. Well if Iraq came out at .86, they would be illiquified immediately. They would lose the country. It would fall into foreign investment hands, 90% of the country would be owned by foreign investors. Iraq is not going to do that and the US is not going to allow it. That is not the form of democracy that we want to set an example. We want them to grow internally as a democracy and set an example in the ME. We don’t want it to seem like foreign investors came in and purchased the whole country. So .86 is out of the question.

2) When you look at $1.14, that was a nominal value. There is two things – an intl currency value and a nominal value. The NV is basically saying it can’t be any less than $1.14.

3) If we look at the high range, and this has been thrown around a lot – $3.22, $3.50 – I don’t think it is going to come in at that price. It would scare investors. There would be a very small profit % on the daily transaction of the currency. It would consume investors equity. It would take a lot longer to gain a profitable margin, a good lipor scale (??) of investment coming out of it – lipor scale is how we measure investment – either 15%, 16%, 17% on a 3 year, 5 year, 10 year basis. So when we look at these lipor scales, an investor isn’t going to go in there at 3.22 and drop 500 million dollars and have to wait 18 months to get a 10% return. He could probably do that by diversifying his portfolio and investing in more conservative areas and gaining an 11-12% return in a 6 month period. And he has to report back to his stockholders.

4) But if we look at 1.75 to 2.12, its not a low scale but its not a high scale. But it gives investors a profitable margin and it allows the country to control the growth of their currency. If they were to RV, I think it would be somewhere between these two numbers.