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The Iraqi Dinar Scam - Part One

 

By John Jagerson, Analyst at Learning Markets


The Iraqi dinar "investment" opportunity is a scam that has been around for a few years and has recently been regaining much of its former popularity. The opportunity is pitched as a way to profit from a nearly worthless Iraqi dinar that is "sure" to appreciate in the future. The scammers promise that millions of dollars in profits are virtually guaranteed if you buy the dinars at today''s values (about 1,000 dinar to 1 US Dollar) and then exchange the dinars back for dollars at a later date once the dinar exchange rate has improved.Dinar

 

This is part one in this series of articles. You can find part two of the iraqi dinar scam here.

 

However, there are some fundamental problems with the Iraqi dinar scam that potential buyers should be aware of before they begin investing in one of the most illiquid currency markets in the world.

 

Lack of registration

It is illegal in the U.S. and most other major economies to market an investment without appropriate securities registration. The scammers get around this requirement in two ways. First, it is technically legal to sell hard currency for its numismatic value. In other words it is possible to sell hard currency as a "collector''s item." Second, some dealers will register with the U.S. Treasury as a Money Service Business (MSB). 


Registering as an MSB is something that dinar dealers will do to put on the appearance of registration and government oversight. However, the difference between a legitimate MSBs and dinar dealers is that a real MBS is not marketing an investment. So ask yourself; if a business has to lie to get around registration are they really making a legitimate offer?

 

Dinars are sold on misleading hype

The potential value of an investment in dinars is often illustrated with references to what happened to the Kuwaiti dinar following the first Gulf War and the German deutschmark following World War 2. These would be good examples except that neither one was a free-floating currency at the time so the value was mostly a function of policy making and official currency management. It is also a fact that no rational investor would base an investing decision on two instances of past data (more than 60 years in the past) without considering all the times this investing strategy did not pay off.

 

Will the Iraqi government pursue a policy of currency appreciation in the future? Since an appreciating currency makes funding your brand new government and paying off past debts more expensive it seems unlikely. An economy in Iraq''s situation is more likely to experience a currency crash or intentional devaluation than a sudden and dramatic reflation.

 

In fact, more recent currency history would seem to show that it is more likely that the dinar will depreciate further in the near term. The fallacy that dinar dealers are relying on is that a growing economy will result in a stronger currency. That is not the case. As the recent examples of Venezuela, Turkey and Mexico show; a growing economy is as likely to be accompanied by an inflating (weakening) currency as not.

 

Many dinar dealers refer to the value of the Iraqi dinar prior to the 1990 Kuwaiti invasion (1 dinar = $3+ US Dollars) as evidence that the potential for the dinar is theoretically unlimited. They don''t mention that the pre-1990 dinar has been demonetized (worthless) and that its value was arbitrarily set by an autocratic regime led by Saddam Hussein. Following the embargo, the ability for the Iraqi government to manage its currency''s value collapsed and it spent the next 10 years at 2,000 - 3, 500 dinars to the U.S. Dollar.

 

Investment risks they won''t tell you about

In the next article on this subject we will outline the major risks of investing in hard currencies like the dinar. If an investor was determined to take a risk on a currency like this they should be prepared for what is likely to happen to their investment''s value and they won''t hear it from dinar dealers.

 

Learn more about currency investing through the following links

- Trading the U.S. Dollar against a basket of other currencies

- How to trade currencies inside an ordinary stock and options account


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