Gold prices are rallying again in Iran’s market, buckling the bearish trend in global markets. The benchmark Bahar Azadi gold coin in Tehran crossed 41 million rials ($357) on Wednesday which marks a one- month high for the precious coin.
Mohammad Kashti-Aray, president of the specialized commission of gold and jewelry at Iran Chamber of Guilds said the rally this week, as has been the case in the past months, was largely due to volatility in the forex market.
"Foreign exchange rates in the current week had an upward trend and gold followed suite," Kashti-Aray told the Financial Tribune in a phone interview.
The US dollar was traded for 115,400 rials on Wednesday down from 117,406 the previous day. This is while two weeks ago the greenback was traded for 109,000 rials.
The former head of the National Gold Association said another reason for the surge in gold prices was the move by the Money and Credit Council – a decision -making body – for scrapping overnight interest rates that took effect on Jan. 21.
The ruling obliges banks and credit institutions to pay interest on deposits on a monthly basis, calculating the minimum balance in one month as the basis.
The new rule notes that interest rates per se remain unchanged and only the mechanism has changed from overnight to monthly basis. It emphasizes that the minimum balance in a month will be the basis for calculating the interest – something opponents of the new rules say is unacceptable.
In the previous procedure, banks calculated the overnight interest for the average amount deposited as short-term accounts and paid customers at the end of the month.
Mohammad Kashti-Aray says another reason for the surge in gold prices is the move by the Money and Credit Council – a decision-making body – to scrap overnight interest rates
The Central Bank of Iran Governor Abdolnaser Hemmati has defended the decision as beneficial to banks' balance sheets and that it would encourage people towards long-term deposits.
Mohammad Reza Pour-Ebrahimi, chairman of Majlis Economic Commission, also believes the decision could help lower interest rates, saying even if it results in a flight of deposits “they come around again”.
But detractors warn that by making the monetary market less attractive, money will again flow toward forex and gold markets.
Added Excitement
Kashti-Aray's comments in fact confirm those concerns – at least for now. "The surge in gold prices has fueled added excitement for gold among people and given rise to false demand even after international gold prices fell in the past 10 days."
The upward trend in local gold prices is also because of the Iranian New Year (Nowruz) in late March when there is increased demand for gold coins. The rise in demand, he said, has caused the gold bubble to grow from 3.8 million rials on Saturday to 4.7 million rials on Wednesday.
The so-called gold bubble is calculated by multiplying the international price of gold at the exchange rate and subtracting it from the price in domestic markets.
According to World Gold Council data, Iranian demand for gold coins and bars for the third quarter of 2018 has been of the ascending order. Demand hit 21.1tons - the highest since Q2 2013 – and accounted for three-quarters of the Middle East market.
In a recent report, WGC expects increased market uncertainty and the expansion of protectionist economic policies will make gold increasingly attractive as a hedge in 2019.
It adds that while gold may face headwinds from higher interest rates and strength of the US dollar, these effects are expected to be limited as the US Federal Reserve has signaled a more neutral stance.
