# What is the Iraqi Dinar rate actually going to be?!

12-31-12 Adam Montana: There’s a lot of speculation on the Iraqi Dinar, and one of the most confusing and uncertain aspects of the final outcome is: The Rate. We constantly hear people making predictions and taking guesses…but what is the Iraqi Dinar rate actually going to be?!

Hi Everyone. I’m Adam Montana, and I’m going to do something I have largely avoided for the past few years… I’m going to give you my analysis of a potential rate on the future (and pending!) ReValuation of the Iraqi Dinar.

There are plenty of theories on what the rate of the revalued Iraqi Dinar will be, and they honestly range from pennies to dollars… my friends, that is a HUGE difference in ROI if you hold several million Dinar!

Why, if the rate is several dollars, then your holdings could equal several million USD! If the rate is in the pennies, then your investment is potentially worth several tens of thousands of dollars… BIG swing there, right?

I’m going to list a couple of speculated rates and the reasons behind them, then I’ll tell you what I think is most likely.

Based on Kuwaiti Dinar.

It’s been said that the rate must equal their neighboring Kuwaiti Dinar rate, which would put the Dinar at \$3+. Many people speculate that the Iraqi’s are a prideful people, and it would be a slap in the face to have a revalued currency be less than Kuwaits.

Based on dropping the 0′s

It’s mentioned many times in the news that the 0′s could be dropped, which would mean one of two things:

1. The 0′s are dropped from the bills, which essentially puts most investors at a break even return. Nothing gained, nothing lost.

2. The 0′s are dropped from the exchange rate, which is currently .00086 (Dinars are worth about 1170 IQD per 1USD, or an exchange of .00086). This means your dinars are worth .86USD per Dinar – in other words, a 10,000 IQD note is exchanged for \$8,600 minus spread and bank fees.

Based on “equal to the USD”

We see articles all the time that reference the US Dollar, stating that the CBI wants the IQD to be equal to the USD. An easy assumption is to simply RV at 1:1, making a 10,000IQD note worth \$10,000.

Based on “they can’t RV low or investors will buy too much!”

Some people state they will not cash in for anything less than \$1. They state that Iraq would be foolish to RV at a low rate, because then big money will come in and buy up a ton of Dinar before it can go higher. (I intend to prove this theory wrong, FYI.)

My Thoughts:

Keep in mind that I’m trying to keep this as simple as possible. I am going to use hypothetical figures, and I’m going to make my point as quickly as possible… we all have better things to do than listen to an old guy like me ramble on for days, right? 😉

I agree with a few of the speculations above. I think the Iraqi Dinar should have a higher value, and I think we are simply waiting on the HCL or Chapter 7 to be finalized… then it will be “GO” time! But my opinion of the rate goes a little deeper… it includes a “business sense analysis” that I think everyone should be prepared to accept.

Iraq is a business – and the business is natural reserves. Iraq holds a majority of the worlds natural gas and also black gold, also known as “oil”. When Iraq is released from Chapter 7 and the HCL has been settled, they will begin operating their business using the same principals any other successful company uses – the goals being profit, sustainability, and success!

Did I mention profit? Yes indeed, friends!

PROFIT.

The most important concept to understand today is this: The CBI makes money on every auction, and they will continue to do so forever. When the Dinar changes value, the CBI buys it at a lower rate, and then sells it at a higher rate.

The CBI will ALWAYS choose the path that makes them the most money. Keep that in mind as we continue with this paper!

Let’s move forward a few steps and talk about a ReValued dinar. I agree that a lower rate than Kuwait will be a blow to the ego’s of the Iraqis. I agree that it should be on par with the USD, or even higher. I agree that the rate WILL get there… eventually.

When the Iraqi Dinar is ReValued to a higher rate, it will become more desirable to do business in Iraq. Many people will be less hesitant to sign contracts and invest in Iraq. The current Iraqi Stock Exchange (ISX) should see some major movement… and the CBI (Central Bank of Iraq) is going to make tons of money on the exchanges!

I believe that Iraq can sustain a very stable currency at a rate of \$3 or higher, but I don’t think they will immediately jump to that rate even if they ultimately desire it to be so.

Here’s why:

An instantaneous RV to \$3.00 will create a ton of wealth – coincidentally, probably about the same amount of wealth that they lost when Saddam Hussein was taken out of power and the value of the Iraqi Dinar plummeted to mere pennies! What’s done is done, though, and we have to look at the situation for what it is today – not what it could have been or should have been.

When the Dinar rises in value and people are ready to “Cash In”, there is only one place that will ultimately buy the Dinar: The CBI.

Since they control the rate and they are the top of the chain, they can set their spread (the fees they charge for cashing in your Dinar) to any rate they want. I’m of the opinion that they will jack that rate up as high as possible in the beginning… and who’s going to say no? The CBI has a monopoly on this market and it is theirs to do with as they please.

A normal foreign currency exchange carries a “spread” of 2-6%. This means if you exchange \$1000 worth of a foreign currency, you can expect to receive approximately \$940 after the spread is taken out. Those numbers in the middle aren’t important; the only important thing is what you walk away with.

Since the CBI has complete control on the spread, which trickles down through every single banking institution that handles the Dinar, we are at their mercy. Don’t miss this next line:

If the CBI won’t buy your dinar, then you will not be able to cash in.

Take a hypothetical rate of \$3.

The CBI can (and probably will) put a hefty spread their buy price – I’ve heard it will be at least 25% if they RV high. This means they will sell the Dinar for \$3, but they will buy it for \$2.25

Personally, I’d be grateful and overjoyed to see a 25% spread on a \$3 RV! Most likely, we will only see about \$2.00 per Dinar at a \$3 RV by the time it gets in our hands (every party involved will take a little chunk, unless you are physically able to go to the CBI. And you can’t do that. So, just accept it – you’re going to pay a spread.)

Once again, the extra numbers aren’t important right now – the only number that’s important is the \$3 and the \$2.25, because that’s what the CBI is worried about.

Let’s say there is a billion USD worth of Dinar out there right now, or 1 trillion IQD. The CBI pays \$2.25 for every \$3 worth of Dinar, then resells it the next day for \$3. That’s a profit of \$75 billion just on the spread. Not bad, right?

The problem is it cost them 225 billion to do that… and that 225 billion goes right into the “debt” column.

My friends, Iraq isn’t about to go into debt so we can get rich. Therefore, a \$3 RV isn’t the answer, and we must look at another possibility.

Take a hypothetical rate of \$0.10 (ten cents)

Again, using the same numbers we have 1 Trillion IQD that needs to be changed out to smaller denominations. The CBI announces the rate at ten cents and also announces that your large notes will be worthless in 90 days.

Every investor would love to hold out for a higher rate, but in this situation you have no choice… you cash out. The CBI will likely use the same spread, so they will buy 1 trillion Dinar at a rate of .10, minus 25% spread, which gives us about \$750 for every 10,000IQD note we have… and the CBI makes 250 million in the first 90 days at an expense of only 1 billion. This puts their debt on this transaction at only 750 million… a far cry from the 225 billion in the \$3 RV!!!

However, this is only the first step. Now I’ll show you how Iraq can easily wipe that debt out by ReValuing the Dinar at a lower rate initially, then making money as the Dinar increases in value over a relatively short period of time.

What about all the other investors that will now come in to buy up the lower denomination notes, speculating that the Dinar will continue to rise?

I completely agree that this will happen! And the CBI will continue to make money on it. In the above situation, the Dinar is being sold by the CBI at .10USD per 1IQD. After all of the large notes are brought in, it is reasonable to assume twice as much money will be poured back into Dinar by speculators, at .10.

Now the CBI is able to sell 2 billion at 10 cents, and they can move the peg on the Dinar up a bit – say, to 15 cents. Investors will cash in for a profit, allowing the CBI to resell at the higher rate and once again make profit.

Of course, not all investors will cash in at 15 cents. For the sake of argument, let’s say half of the investors sell out at that point. The CBI pays 0.1125USD per dinar (A profit of 12.5% for the investors!!!) and resells that billion for 15 cents – securing a profit of 375 million.

The CBI’s “debt” on the original RV is now down to 375 million… do you see how this is working? The CBI is able to make up the “loss” on the original RV simply by continuing to hold auctions and allowing more and more people to profit on the increasing value.

At this point, in our hypothetical situation of a 10 cent RV, the CBI has covered half of it’s loss with only one “repeg”. They can continue to profit all the way up to the final rate of \$1, \$2, \$3, or higher – as long as investors are willing to buy the Dinar, they can keep moving it up.

And the way things are going over there… why wouldn’t we keep buying? I know I plan on doing so!

In conclusion, I want to caution everyone to be careful with this investment. As good as things look, we never know when some hair brained Arab is going to pull the pin on a grenade or something silly like that. Only buy what you can afford to lose, and always consult a professional before making investment decisions. I hope you found this article to be helpful!

Best regards and WARMEST RV wishes.

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