Tehran Market: Gold Coin Loses Shine as Bubble Deflates

There seems to be no end to the gold coin fever engulfing Iran's market. Despite the Central Bank of Iran's attempts to bring the precious metal– traditionally favored by Iranians as a safe-haven investment– down from its six-year high, the gold coin bubble has so far refused to deflate altogether.

However, officials and pundits are hoping against hope, after Bank Melli Iran–through its Kargoshaee branch–launched a massive auction on Saturday to calm the market.

The benchmark Bahar Azadi gold coin's bubble has halved, being sold for 13.60 million rials ($329) in Tehran's market on Tuesday, as inquiries by Financial Tribune showed. However, reports by local media indicated that the coin had reversed course in late trade and gained 40,000 rials.  

Azadi was hovering at 14.50 million rials ($351) just before the news of the auction put the brakes on the yellow metals' feverish bull run, mainly fueled by rising global prices and a surging US dollar in the domestic market.

This had led to an unprecedented rise in the bubble of the precious coin, reaching as high as 2 million rials ($48) last week. This prompted some to call on regulators to intervene before the market overheats further.  

Although some business figures reacted harshly to the CBI move, which reminded them of heavy (and mostly futile) interventions of the previous administration– others, like the head of Tehran's Gold and Jewelry Union–readily embraced it.

"We do support the act of CBI, as it is among the regulating body's legal mandates to stabilize the market," Mohammad Keshti-Aray, the head of Tehran’s Gold and Jewelry Union, told Financial Tribune in a telephone interview.

Keshti-Aray added that since the Saturday auction, the gold coin's bubble has been reduced to 1 million rials, which is measured in comparison to the global gold prices.

The official expected prices to continue their descent in the coming day, as the next stages of the auction are to be held in the coming days.

On Tuesday, Half Azadi also fetched 6.8 million rials ($164), registering a slight drop alongside its other peer coins.

The anticipation of a gold coin implosion was further strengthened by the announcement that the auction will continue with a lower reserve price in the coming days.

The coins have already been put on the block well below the market value, with Azadi being offered at 12.88 million rial ($311.1) and Half Azadi at 6.45 million rials ($156).

Although initially nonchalant, the market gradually began to respond, as the auction began in earnest. The coins are being presented in packs of 20 and hence the reserve of more well-heeled investors (ordinary folks have been warned not to get swamped into the affair, risking their savings in hopes of quick gains.)

Masoud Soleimani, chief executive of Bank Kargoshaee, told Fars News on Monday that the bank would soon include bullion in the coming auctions. He defended the banks' intervention as effective, saying 5,900 coins had been sold in the first two days of the event.

"If the supply of gold coins maintains its current trend, the coin's bubble will entirely end in 15 days," Soleimani said, adding that the central bank has not yet announced an end of the auction.

Market Risks

The gold coin rally comes while two other markets, namely the foreign exchange and stock markets, have lately registered rallies of their own.

The rial is shy of an all-time high against the US dollar and the stock market also broke past its all-time record on Saturday.

The rial was quoted at 4 1,300 to the dollar on Tuesday, weakening further from the Monday's close.

As different markets compete for investor attention, the CBI policy seems to have succeeded in deterring people away from the speculative currency and gold markets, as it encourages them to stick with the tried and tested bank deposits, whose long-time appeal were dented by the bank's rate cut in late August.

Any flight of deposits from banks and into other markets could cause a surge in money supply and threaten the hard-won single-digit inflation achieved by the government in 2016.

Pouya Jabal-Ameli, an economist with the CBI, believes that the move, at the current scale, was necessary since first off all, the central bank is the main supplier of gold in the market and second, the bubble had become too overblown to ignore.

"Inaction by CBI could have had adverse inflationary effects, since the gold market and the currency market mutually impact each other, with possibly disruptive effects," he said.