As chaos ensues in the Ukraine, we are seeing broad stock market indexes all over the world fall in price. This is going to create many opportunities for deep value investors. However, shorter-term traders may want to consider owning some assets that tend to rise in value with crises. In this article, I point investors to three of them.
The first is gold. Investors tend to flock to gold and gold-related equities whenever there is chaos in the world. They fear that global business will suffer and that higher risk currencies and bonds will lose value during times of crisis. Gold stands out as a safe-haven trade and as money comes out of the aforementioned assets, gold will likely benefit. True, gold doesn’t become more valuable because of a crisis, as gold’s value longer term is largely a function of the global money supply. However, as I have argued elsewhere, gold is fundamentally undervalued given the rising supply of U. S. Dollars, and an international conflict could be a catalyst that drives it higher.
Investors interested in gold should consider owning shares in a gold-backed ETF. While most investors tend to flock towards the SPDR Gold Trust (NYSEARCA:GLD), I prefer the Sprott Physical Gold Fund (NYSEARCA:PHYS), which has a lower expense ratio and it is taxed at a lower rate if you hold it for longer than a year. However, the SPDR Gold Trust will do a better job tracking the spot price of gold, and given that I am pointing out gold here as a short-term trade, this could be the better option.
Second, investors should consider owing oil. Whenever there is a global conflict, the price of oil tends to rise, especially if a major oil producing nation — such as Russia — is involved. Whenever there is a global conflict, there is a heightened risk that certain groups of nations will not be able to get the oil they need. Furthermore, there is a heightened risk that some oil production may go offline, and even a small decline in the supply of oil can have a major near-term impact on its price. While these events may not come to fruition, traders will still likely bid these assets up.
Investors interested in oil should keep in mind that there is a risk — namely that the fear of international conflict may slow the global economy, which decreases the global demand for oil. Therefore, investors interested in oil might want to hedge a long oil bet by buying a put option on an asset that is economically sensitive, such as the SPDR Indistrials ETF (XLI) or the iShares Russell 2000 ETF (NYSEARCA:IWM).
As far as choosing a way to play oil, there are several ETFs. There have been long-term tracking issues with the largest ETF; the United States Oil Fund LP (NYSEARCA:USO) because it has to roll over its futures contracts every month. Futures contracts from different months don’t necessarily trade at the same price, and the fund has to pay commissions. However, since we are looking at short-term opportunities, this won’t be a major issue. Investors who are concerned can consider the iPath Pure Beta Crude Oil Fund (NYSEARCA:OLEM). Also, since we are dealing with a European conflict, investors might want to bet on Brent Crude Oil rather than West Texas Crude Oil. The former reflects the global oil market whereas the former reflects the U.S. market. Therefore, another option is the United States Brent Oil Fund LP (NYSEARCA:BNO).
Third, investors should consider taking a position in U. S. Treasuries. While I think that Treasuries are fundamentallly overvalued when investors sell economically sensitive assets, such as stocks and foreign currencies, they often put it into Treasuries. Long-term maturity Treasuries tend to outperform short-term maturity treasuries whenever Treasury prices rise, so investors should consider an ETF such as the iShares Barclays 20+ Year Treasury ETF (NYSEARCA:TLT), which is already having a very good year (+7 percent year-to-date plus coupon distributions.)
Ultimately, there is a good chance that stocks will go lower as the Ukrainian crisis plays out over the coming days, weeks, and months. Even the best valued, high quality stocks are going to fall in this scenario as investors want liquidity and safety. Therefore, there will be a good opportunity to buy your favorite stocks. But in the meantime, you can probably make some quick money buying any of the three assets that I list above. If you are buying any of these funds for a trade make sure to use stop-orders as we can see rapid corrections. Also, remember that the best time to take profits is probably when it seems that everybody agrees that these are the best assets to hold. Selling may be painful, but it will be the right decision.