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Could Iranian Sanctions Boost the Price of Gold?

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Secretary of State Mike Pompano recently announced the US will impose the “strongest sanctions in history” on Iran. This follows Trump’s decision to pull the US out of a nuclear deal agreed to during the Obama administration.

Sanctions will certainly put significant economic pressure in Iran, but the country may be able to weather the storm using gold – and this could help push the price of the yellow metal up.

The US withdrawal from the nuclear accord means the reimposition of sanctions that had been lifted, and Pompano said the US plans to impose new sanctions in order to put “unprecedented financial pressure on the Iranian regime.” The previous sanctions virtually banned all trade with Iran with some exceptions for exports of products “intended to benefit the Iranian people” such as medical supplies. It remains unclear what additional measures the Trump administration plans to take.

As an article in Forbes points out, sanctions not only prohibit businesses from trading with Iran, they also put significant restrictions on any financial institution connected to the US. Since the world banking system is intimately tied together, sanctions virtually prohibit any western bank from involving itself in Iranian trade.

But Iranians could skirt these restrictions by doing business in gold.

Part of the reasoning is that gold has a long history of use when other currencies are unusable. On top of that, gold has long been used in Iran, both by the government and the people, both to store value and to skirt sanctions. ‘One of the historical values of gold is the ability to use it in all sorts of circumstances,’ says Jeff Christian, founder of CPM Group, and who has decades of experience navigating the murky world of gold and other precious metals. In other words, even when payment through banks won’t work, gold is frequently an acceptable medium of exchange.”

Iran already has experience selling oil for gold. Before sanctions were eased under the Obama administration, Iran’s state-owned oil company circumvented sanctions by selling oil for Turkish lira and then buying gold. Christian told Forbes, “If you go back to the period before 2015 Iran was one of the largest places for gold demand at times.”

With Turkish lira quickly depreciating as the country battles high inflation, Iran my cut out the middle step in the process and sell oil directly for gold bars. This will result in a boost in gold demand, according to a CBM Group report.

The result is that the overall movement by the US government against Iran announced on 8 May is likely to further stimulate demand for gold in Iran.”

This will likely put upward pressure on prices.

Analysts say sanctions will also increase demand for gold by the Iranian people as they try to cope with their economic impact. Iran is already dealing with rampant inflation running at around 70% annually. A Johns Hopkins University economist said the inflation rate will likely accelerate with the reimplementation of sanctions.

The devaluation of the rial creates significant problems for Iranians looking to preserve purchasing power and wealth. According to the CPM reports, private citizens cope by buying a lot of gold.

The Iranian currency, the rial, is pretty much worthless thanks to decades of revolutionary Islamic governance and many years of sanctions. No one wants to hold their wealth in rial, so they buy gold.”

The imposition of strict sanctions will almost certainly increase the demand for gold significantly in Iran, both by the government and everyday people. This increase in demand will likely put upward pressure on the global price of the yellow metal.

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