Three Ways to Protect Your Wealth from Global Uncertainty
Nothing helps create volatility on the stock market like the threat of war. And just a few short days after the close of the bloated $52.0-billion behemoth in Sochi, Russia has embraced its ne’er-do-well Olympic spirit and invaded the Ukraine. Or, according to Putin, “pro-Russian soldiers” have simply moved into the Ukraine to defend Russian interests.
With a growing threat of war/retaliation on the horizon, investors have been pulling their money from riskier assets, like stocks—sending global financial markets reeling. Crude oil and gold prices, on the other hand, have been on the rebound.
While it seems utterly crass to deconstruct the potential for war down to economics, the fact remains—a stand-off or sanctions could both disrupt gas supplies to the European Union and send U.S. crude oil prices higher.
For starters, any issues in the Ukraine could disrupt the flow of natural gas supplies from Russia to the European Union. That’s because the European Union gets about a third of its crude oil and natural gas supply (and a quarter of its coal) from Russia, mostly piped through the Ukraine. Russia, the world’s biggest crude oil producer, generated 10.9 million barrels a day in 2013 and currently exports close to 5.5 million barrels of crude oil per day.
Since the end of the Cold War, no one really worried about relying on Russia for crude oil and coal. All of that has changed. While the notion of war is remote, it’s still on the table. Nations far removed from Russia and Ukraine might push for economic sanctions, just as the U.S. has done, threatening visa bans, asset freezes, and trade restrictions—but the European Union, because it relies on Russia for so much trade, is more likely to push for mediation.
Investors aren’t entirely convinced. Brent crude oil in London surged to its highest levels in two months to more than $110.00 per barrel. U.S. crude oil prices, meanwhile, have almost caught up, jumping to a six-month high near $105.00 a barrel. And with the end of winter nowhere in sight, the near-term outlook in North America is for higher crude oil and gas prices.
The threat of war with Russia has, once again, highlighted the need for the Western world to wean itself from politically unstable sources of crude oil, such as Russia or the Middle East. But that’s clearly not going to happen for a while yet.
Right now, though, investors who want to avoid risk need to remove risk from their retirement portfolio. The best way to do that may be to sell certain positions and increase your cash holding. It isn’t very exciting, but it’s a safe way to protect your cash.
Another safer investing instrument is the iShares TIPS Bond (NYSEArca/TIP), an exchange-traded fund (ETF) that protects against intermediate-term inflation with an exposure to inflation-protected U.S. Treasury bonds. Those investors who are less risk-averse might want to consider researching ETFs, like United States Gasoline (NYSEArca/UGA) or United States Oil (NYSEArca/USO).
Investors might also want to consider diversifying their portfolio and hedging against global uncertainty by increasing their exposure to gold. They can do that either through a gold miner like Barrick Gold Corporation (NYSE/ABX, TSX/ABX), or the Market Vectors Gold Miners ETF (NYSEArca/GDX).