Buy Iraqi Dinars?

I recently received the following question from a student at Virginia Commonwealth University and I thought I would pass on what I told him.

Question: This past Wednesday i talked to two guys who had both bought the Iraqi Dinar in large amounts. 

I figured you might have some financial thoughts on this investment and was curious what your response would be. 

One guy had 40,000 Dinars and the other guy 2,000 Dinars.  They said that in time (20 years) that the Dinar should rise from the current 1/10 of a US cent to maybe equal in which case they would have 40 million and 2 million dollars is what they said. 

What is the probability of this?  I did some research and everything is against it.  I have also heard stories from you when everyone was against you so I figured I would get your take on it.  Thanks.
 

My Response:

Very interesting.  It is a long shot about equivalent to buying a lottery ticket.

If the country changes governments they could repudiate all the old money making it totally worthless (it has happened many times before in unstable countries).

The other risk is that the Iraqi government will simply inflate their currency out of existence (another common scenario). Finally there is no guarantee that one Dinar will ever be worth one Dollar even in industrialized stable countries.

The perfect example is Japan (another government we helped install a little over 50 years ago. One dollar still buys 106 Yen.  So roughly a yen is equal to a penny.  Now if a Dinar went from 1/10th of a cent to a cent you still would make 10 times your money, which sounds good until you realize that if it takes 20 years your compound interest rate is actually only 12.2%. 

 Basically it is a bet that the Iraqi government that the US installed will last for 20 years and that they will be fiscally responsible and not inflate their money out of existence. 

It could happen but I wouldn’t count on it. It is even less likely if Democrats get elected and pull the U.S. out of Iraq prematurely.

There is an old saying, Barron von Rothschild (one of the world’s richest men) said that the time to buy is when everyone else is selling because “blood is running in the streets”.

Well that is literally what is happening in Iraq, so it is possible that it could work out. Rothschild was known to have his own team of spies so he knew what was really going on while others were still clueless. He didn’t just bet on the long shots just because of the odds. 

Hope This Helps,

Tim

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