Iran's Gold Market Rally Fuelled by Rate Cuts

As if the recent gold rally was not enough of a surprise, the precious metal continued to gain in strength in Tehran's market–this time fueled by the Central Bank of Iran's decision to get tougher on the interest rate cut's implementation.  

With deposit rates coming down from their historic high, investors are being stripped from one of their safest havens, namely bank deposits, and showing a renewed preference for the bright metal.

However, the effect has been less dramatic than expected, as many investors are still reluctant to desert the stable monetary market for other volatile ones and lenders are coming up with innovative methods to circumvent the CBI decree.

The deputy head of the Tehran Gold and Jewelry Union confirmed that the volume of demand for the valuable metal has hiked.

"It must be noted that a portion of this demand is because bank interest rates have been reduced and the people are now more inclined to turn their savings into gold," Ayat Mohammadvali also told IRNA.

Nearly two weeks ago, CBI announced that as of September 2, all banks and credit institutions should refrain from offering interest on deposits higher than the previously decreed 15% while capping their interest on short-term deposits at 10%.

In the runup to the implementation date, banks scrambled to attract as many deposits possible by inviting customers to renew their contracts before the decree kicked in and thereby postponing the real effect of the rate cuts being felt by at least another year.

However, in the absence of a developed capital market, some decided that they no longer find the lower deposit rates attractive and moved their money to other parallel markets such as the gold and coin markets that are the next popular options, along with the currency market, for many Iranians.

On Saturday, Bahar Azadi, the benchmark gold coin, gained 250,000 rials or 2.07% to fetch 12,320,000 rials ($320). Emami gold coin was traded for 12,538,000 rials ($325.6), marking an increase of 275,000 rials or 2.24% compared to Thursday's close.

According to TGJU's website on Sunday, Bahar Azadi gained another 10,000 rials and was exchanged at 12,430,000 rials ($322.8) while Emami was traded at 12,694,000 rials ($329.7) to register a multiyear record.

But as Mohammadvali says, a gold bull run is temporary, adding that some influential factors in global markets such as the rise in foreign debts of the US government and an uptick in US unemployment have had an impact on gold prices, which drove it up to $1,325.

Among other psychological effects impacting the gold market, he referred to the seasonal demand for gold coins on the occasion of Eid al-Adha and the approaching feast of Eid al-Ghadir.