(Hint: It’s Not the Iraqi Dinar)
By Sean Hyman, Editor, Currency Cross Trader
It’s a strange currency world we live in.
The two most traded currencies – the dollar and euro – are both suffering. The euro is fighting an uphill battle with a sovereign debt crisis, while the dollar is paying the price for all the Fed’s currency meddling over the last few years.
At the same time, other currencies have the exact opposite problem – they’re too strong. The Japanese yen has gained so much in value that the Bank of Japan had to intervene several times over the past year to drag down its value.
With all these currency crises in full swing, it’s no surprise that investors are looking for alternative currencies to buy and hold.
But unfortunately, some are finding the Iraqi dinar…
Thanks to some slick marketing campaigns, first-time currency investors are pouring their savings into the Iraqi dinar because they believe it “will revalue and hand them a fortune” a few years down the line.
Personally, I don’t buy into this dinar story.
For my money, there are much stronger alternative currencies to buy and hold for the long-run. I’ll introduce you to one in just a second. First, let’s take a closer look at the dinar…
The “Big Boys” Steer Clear of the Dinar
The short answer is, as a currency investment, the Iraqi dinar is sorely lacking in the fundamentals that you want when you buy a currency for the long-term.
Besides being an oil nation (and let’s face it, there are plenty more desirable oil nations out there), Iraq is not what we would classify as a politically sound country. After all, they just put their new constitution together in 2005.
And long-term growth? Stability? That’s all debatable in Iraq.
But all that aside, what’s more important is you can’t trade the Iraqi dinar. The dinar is NOT one of the 60 tradable currency pairs in the $4 trillion Forex market.
That means the big institutional players don’t want anything to do with this currency. If they did, you would be able to trade it.
Instead, only the most speculative retail, individual investors are buying into this Iraqi dinar theory. That’s a bit concerning. It tells me that these retail investors have been sold a bill of goods – not a real asset with long-term value.
In fact, I look at this currency more like a penny stock than anything else. It’s extremely risky, more like a shot in the dark than a long-term currency play. That’s why none of my currency colleagues recommend it.
Just Because It Revalues,
Doesn’t Mean You Profit
As a currency, most speculators have been buying the Iraqi dinar because they are hanging their hats on a potential revaluation. Various websites have been claiming this revaluation will happen since 2004.
But let’s assume for a second that Iraq did revalue their currency. That does NOT mean the currency will necessarily leap in value compared to the U.S. dollar.
After all, “revaluing the currency” didn’t help anyone holding the Turkish lira a few years back.
In 2005, the Turkish government revalued the lira from 1,350,000 lira to 1.35 lira.
In other words, the government slashed six zeroes off the price of the lira. But in reality, the “new lira” was still worth the same amount as the old lira in dollar terms. Before the revaluation, one dollar bought you 1.3 million lira. After the revaluation, one dollar bought you 1.35 lira.
But whether it was a million lira or a single lira, this revalued currency was still worth the same in dollars.
Now could the same thing happen in Iraq? Absolutely.
That’s why I would much rather focus on more stable emerging markets with currencies that have a much higher statistical probability of rising in value.
For instance, the Chinese renminbi…
Forget the Dinar, Buy This Instead…
At this year’s Global Currency Expo, five different currency experts recommended you buy and hold the Chinese renminbi for the next 10 years (that includes yours truly).
(By the way, not one expert at our sold-out currency conference recommended you buy the Iraqi dinar – and these guys are the top of their fields.)
So why buy the renminbi? It’s more than just the real possibility the Chinese will revalue their renminbi once again, or even let it free-float.
The most respected financial minds in the industry are saying that the Chinese renminbi will eventually replace the U.S. dollar as either the next, or one of the next reserve currencies of the world.
That means central banks which currently hold dollars, euros, and gold in their coffers will be able to stockpile tradable Chinese renminbi instead. Scary thought, right? It would be a devastating blow to the U.S. dollar, and would force the dollar/renminbi exchange rate to plummet.
More importantly, it also means the dollar will have some competition for pricing of the world’s commodities.
If commodities were priced in anything but dollars, everything you buy on a daily basis would skyrocket in price. As a country, we would be forced to pay for real commodities with real assets (not just more printed dollars), like all other countries in the world do now.
Buying the Iraqi dinar wouldn’t help you there. But buying the currency that commodities could potentially be priced in (like the renminbi) would offer some protection.
Again, no “revaluation” necessary… just the steady moving hand of the market.
Bottom line: there are plenty of reasons NOT to buy the Iraqi dinar this year, and plenty of great reasons to buy renminbi instead. So I say stick to the currencies that have value, and leave the dinar for the speculators who don’t know any better.
Have a Nice Day!
Editor, Currency Cross Trader