Iran’s gold-for-oil offer won’t shake bullion world
Gold bugs may take heart from Iran’s decision to accept the metal as payment for its oil rather than dollars, but few in the bullion market believe Tehran’s customers will leap on the opportunity to do so.
Iran’s central bank governor said on Tuesday Tehran was willing to accept gold as payment for its oil as sanctions imposed by the United States and Europe hamper the country’s financial institutions and force its trading partners to seek alternative ways to settle transactions.
Gold, which has risen by some 13 percent so far this year to around $1,780.00 an ounce, is often bought as a last-resort alternative to fiat currencies, as a safe-haven against unpredictable stocks and bonds or as protection against rising inflation that can erode the value of any portfolio.
One of the advantages to Iran of taking gold as payment is precisely its status as a quasi-currency and one which, in its physical form at least can help the republic bypass the sanctions on its financial systemt. The advantages for its customers however are less clear.
“It’s down to the sanctions in place on currency transactions in and out of Iran … That is probably the main motivation. You can’t transfer dollars, but at least you can put a boat in the water and send some gold,” Ole Hansen, Saxo Bank senior manager, said.
“For the recipient of the oil, it’s suddenly a different ball-game. Instead of transferring some money, there is the risk of who covers what costs (of the deal). Who is going to carry that? So I don’t think it is going to fly.”
Iran used gold and oil to pay for shipments of grain earlier this month, according to European grain traders. It has also used currencies such as the yen or the rouble to pay for grain imports, thereby skirting the need to employ either dollars or euros.
In the unlikely event that using gold in barter deals became widespread, it still would not create a new long-term source of demand, analysts say.
“When Iran sells oil and receives gold, it will have to use the gold to do something else. If this became an established practice, which I would be very surprised by, yes there would probably be a positive impact on the price,” RBS analyst Nikos Kavalis said. “But it’s not the same thing as there being an actual end-use for gold.”
Sanctions from the West include a phased ban on its oil imports and some of Iran’s largest trading partners such as Japan and South Korea have bowed to U.S. presure and announced cuts to quotas, while Iran’s two largest customers, India and China, have not.
“We suspect there is quite a lot of bilateral trade (with China) – it isn’t simply a case of accepting gold – what Iran is prepared to do is accept a certain amount of domestic currency of the countries that it is trading with,” Nic Brown, head of commodities strategy at Natixis, said.
“There is in effect a barter system going on for much of the oil that Iran is still exporting…it’s effectively being netted off against goods and investment and services that Iran is receiving from these countries. It won’t ever be a case of gold substituting entirely for the dollar,” he said.
India is looking to source more oil from the likes of Iraq or Saudi Arabia, as trading with Iran has become more difficult, but local gold market experts say the chances of the country using gold to ease its transactions with Tehran are nonexistent right now.
“Exports in any form is not possible unless and until Iran brings down its import duty,” said Rajiv Jain, chairman of Gems and Jewellery Export Promotion Council, adding that Iran imposes an import duty of 30-40 percent on jewellery or other forms of gold.
There is also the issue of China, rapidly closing in on India for the position as world’s largest gold consumer. The country is also the largest producer of the metal and its mines cannot churn out enough bullion to satisfy demand.
“China interestingly enough is under-resourced in terms of its gold reserves but, not withstanding that, its also the world’s biggest gold producer so presumably its got the ability to fund any purchases from Iran that it needs to put through,” Ross Norman, chief executive of bullion dealer Sharps Pixley said. “What the Iranians are saying is that there are other financial mechanisms out there for those who want to transact.”