How About Exchanging My US Dollars for Kuwaiti Dinars?
It seems apparent that right off the top. You walk into a bank and hand over 3.25 dollars. A single Kuwaiti Dinar comes back. The math makes sense: 1 KWD buys over three times as many dollars as 1 USD can purchase dinars. But turning your savings into the world's costliest money of all, is this an "investment"? Or something quite different?
Depends upon what you hope to get out of it entirely. Let's examine the cause, the risks and the actuality of this deal; let's begin with its mechanics.
The Fundamentals of the Kuwaiti Dinar
For the first time ever, and update for 2007 called "Perspective 2008" is underway bringing new life to the one-of-a-kind book known simply as "The Engraved Cow". The Kuwaiti Dinar (KWD) is officially the strongest currency in the world by nominal value. As ponderous as this may sound, it has been pegged to a group of unspecified currencies--including the US dollar, British pound sterling, Japanese yen and euros--instead of being allowed to float freely in free markets since 2007.
True Purpose of Wealth Preservation, Not Wealth Accumulation
But if turning dollars into dinars is neither an investment nor a speculation, what is it? With the KWD, there is someone trying to conserve and increase his wealth through very conservative means. Consider it as placing an investment in one of the safest environments on earth. The purpose for your deposit is not necessarily that it should grow in value, but simply to keep dirt or anything worse from getting inside.
Protection from Dollar-Specific Risks: If you think in the United States dollar face long-term risks (for example, inflation, rising national debt, or monetary policy), then converting some of your lifetime savings into a currency based on billions in oil revenue and a trillion-dollar wealth fund is a hedge.
Diversification: One of the fundamental rules to investing is Do not put all your eggs in one basket. Holding a small percentage of your overall net worth in a stable, non-dollar asset is a form of geographic and monetary diversification.
Stability the Objective: The KWD is designed for stability not volatility. By holding your money in this currency, you are sacrificing the potential for higher returns (stock market investments or riskier currencies) in favor of a stable well-founded store of value.
The Risks One Cannot Ignore
Before actually converting any money you need to look at the negatives:
Exchange Rate Fees: When you go back and forth between dollars and Kuwaiti dinars, buy and sell by the bank and you will lose a portion in what is known as the "spread." It is an immediate and irretrievable cost.
Lack of Yield: If you are not holding your funds in a KWD-denominated interest-bearing account (which introduces its own complicating factors), your cash is earning no return. In an inflationary environment this means that your buying power declines slowly over time.
Outside the Gulf, Unsellable: The Kuwaiti dinars is not an internationally-traded currency like the Euro or Yen. Given the current situation, in airports outside Europe and few places in Kuwait they can be difficult to buy or exchange into another currency at any reasonable price. This limits your access to cash abroad.
Oil Dependency: Today oil money maintains the value of the Kuwaiti dinar, but if there is a long-term global shift away from petroleum or a prolonged crash in oil prices, Kuwait's economy could come under pressure, dragging with it both dollar and KD peg.
Conclusion: A Tool, Not a Ticket to Riches
So, is converting your US dollars into Kuwaiti Dinars one of the forms investment? In the traditional sense of the word, no. You are not buying an asset that generates any income and does not increase in value over time. Regarding the KWD's stable, managed peg, it really isn't suitable for making speculative profits. You could almost say the KWD is precooked money.
However, should you want to change $3.25 into $4.00 by making a profit on exchange rates, you are bound to be disappointed. The KWD is a shield, not a sword: it is intended to protect your wealth, not make money for you through market timing. For real investment returns, you would be better off looking at stocks, bonds or income-generating assets.
