Defensive Investing for Times of War
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Taking a look around the world, I think it is fair to say that things are becoming less stable. Without making any political arguments, or predictions, but considering only possible investing implications, it may be a useful time to contemplate the possibility of war, and the possible consequences of war.
The most obvious place to consider is the mideast, and the possible impact of yet another war on oil prices. Iran may be moving toward an atomic bomb. And Israel has repeatedly said that they will not tolerate a nuclear Iran. The Israelis have threatened war many times, not idly. For their part, the Iranians are not backing down. Iran supplies 4.9% of the world’s oil, and supply disruptions from past mideast wars have led to sudden and sharp spikes in the price of oil, from 25-70%.
But that is only the beginning. Iran has threatened to blockade the Straits of Hormuz in the event of war, and 35% of the world's seaborne supplies move through that strait. Even a militarily outgunned Iran could very possibly cause huge disruptions or a possible closure of traffic through the strait, which is only 21 miles wide at it's narrowest point.
Europe needs that oil. And we, of course, need that oil too. But we are not the only ones who need it. At least one Chinese official has said that China is prepared to go to war, including World War III, if they have to to protect their access to Iranain oil.
Obviously, everyone has much to lose in the event of war. But even the briefest of glances at human history is cause for alarm -- history is full of war after war after war, most of which most people did not want, but which came anyway. So while I don't expect a shooting war between the United States and China (and Russia,) it is unfortunately all-too-easy to imagine us getting into a drawn-out proxy war in the middle east, with the US on one side, and China and Russia on the other. It sounds like a nightmare because it is a nightmare, one that would have a dramatic impact on energy prices, all energy prices.
Energy is fungible, meaning that one source can be substituted for another, but it is not perfectly fungible, because it takes time to convert the nation's fleet of vehicles from gasoline to natural gas, or to change the political perceptions of nuclear power, or to build enough windmills to eliminate the need to burn coal to generate electricity, etc. However, despite the imperfect fungibility, a rise in oil prices will lead to a rise in natural gas prices, as people substitute oil for gas, which will lead to a rise in coal prices, and uranium prices, etc. So war, if it comes, will raise energy prices.
With that in mind, which companies would benefit the most? To my way of thinking, the best bets here would be oil companies that have large petroleum reserves within the safety of the United States itself -- companies like Hess (NYSE: HES) and Marathon Oil (NYSE: MRO) both of which have huge reserves in the continental United States, and both of which have approximately 75% of those reserves in oil, rather than natural gas. (Rather than plagiarize someone else's work, let me refer you to this excellent article on Hess and Marathon by fellow Fool Maxxwell A. R. Chatsko.) Hess also has the endorsement of hedge fund titan David Einhorn, who is my own personal favorite Smartest Guy In The Room to follow.
Along with oil, another possible commodity to benefit from war or the threat of war is gold. Uncertainty and fear drive people to seek the safety (relative) of gold when they begin to grow worried about the safety of currencies. And war, historically, has been associated with high inflation, as governments seek to fund their wars by printing money, and the scarcities associated with war (of oil, for example,) also, in and of themselves, lead to price inflation. One way to protect yourself from inflation, or declining currency value, is to buy something solid, whether real estate, fine art, or gold. For the average person, gold is the easiest of these types of things to buy, store, and sell. And the popular SPDR Gold Trust ETF (NYSEMKT: GLD) is an easy way to own gold. (Yes yes; I know -- not actually gold, but a paper claim to a proportionate share of the gold held by JP Morgan in a vault somewhere under Manhattan. Many believe that that paper claim is not quite solid enough, and want actual physical metal, coins or bars, in their hands. Sounds OK to me, except now you have to rent a safe deposit box, or dig a hole, or something; plus you have higher transaction costs buying and selling than you do with GLD. However, I can certainly see the sense to having your own physical metal, given that commodities trading firm MF Global somehow managed to lose (vaporize? steal?) $1.6 billion of client funds that were supposed to be segregated.) Don't look now, but gold has risen from about $1500.00 an ounce in June to about 1,775.00 today.)
Silver moves in tandem with gold, and is also an inflation hedge in time of war or unrest or rampant money printing. The silver market is only about one tenth the size of the gold market, so silver tends to have wilder price swings than gold. But silver is unlike gold in that it has significant industrial demand in all sorts of products, which demand presumably puts a floor under the price somewhere, though doubtless considerably lower than where it is today, $34 and change per ounce, from less than $26.00 in July. The analogue silver ETF to GLD is the iShares Silver Trust (NYSEMKT: SLV).
As a final note on gold and silver: While I can see the benefits of holding physical metal, I myself don't ascribe to the "prepper" view of precious metals, that is, that you should have some on hand to use to barter for food, medicine, etc. after the World As We Know It ends. This view has never made sense to me, for if you want silver and gold to barter for food etc., why not just BUY food, medicine, etc. and hoard those instead of gold and silver? Furthermore, if I myself were going to hoard anything with the idea of using it to barter in a post-apocalyptic world, I'd probably hoard good ol' booze, given it's long and successful history as a liquid liquid, black-market, barter currency. Plus if things get that bad, you can always drink your barter stash. In a post-apocalyptic world, the gold and silver coins, alas, may only be good for tiddlywinks.
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