The battle for resources has taken a sinister turn.
Argentina started the ball rolling a couple of weeks back. And then Bolivia joined in. Both countries are expropriating (stealing call it what you will) key energy and utility businesses.
And the worrying thing is... I believe it's a battle that's set to escalate. That means you're going to have to be increasingly careful about where and how you invest your money.
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Governments are always dangerous beasts especially when they're desperate to raise extra money to fill their coffers and win votes.
They've got no problem taxing the hell out of your stocks especially when they're involved with natural resources and utilities. And if they want to show-off to their electorate, they'll even steal the whole shebang.
The South American electorate may be celebrating today, but this is likely to be a severely bad move over the long run. Today I'll show you why and how to protect yourself.
How desperate governments pillage the foreigners
A couple of weeks ago, Argentina's President Cristina Fernandez de Kirchner shocked the world with her statement that she's taking back control of Argentina's largest oil producer, YPF. Spanish co-owner Repsol can get lost as far as she's concerned... this is for the Argentinian people the people who put her in power!
Evo Morales, Bolivia's president, must have looked on and realised that this was a splendid idea. A couple of days ago, he sent the army in to seize control of their electrical grid... again wresting control from a Spanish owner.
Wow. This must be the last thing Spain needs right now. Maybe that's what emboldened the South Americans to act so quickly and decisively. Stick the knife in while the Spaniards are busy with other matters like keeping their country from going bust!
Of course, both presidents' subjects are delighted I mean, why wouldn't they be? Normally a government pillages its own at least these guys are picking the pockets of foreigners.
And of course it's so easy to do... it's not as if the owners can just pick up their assets and go someplace else. And this is the great problem for owners of resource stocks and even utilities they're easy to steal, and they're even easier to tax.
The president puts in a spurious claim that the owners/co-owners aren't investing in these businesses. So best they take them back!
Now I don't know whether the Spanish have under-invested or not. But it doesn't really matter... because I strongly suggest that things aren't going to improve now.
When governments take control of resource companies like oil majors, they nearly always use them as a cash-cow to fund wasteful budgets. Rarely do state-owned oil majors reinvest back into exploration so they can replace the reserves they're using up. It's one reason the oil price is so high today...
According to the US Energy Information Administration, nationalised oil companies control around 88% of proven reserves (as of 2007). And most governments are very short-sighted... who cares about the long term, elections are fought in the here and now.
And it's the same with mining companies once governments get their paws on a business, they run them down. Extracting cash to pay for votes.
Why you need to tread carefully with resource stocks
Last year, Zimbabwe's Mugabe regime announced that they were part-seizing its mining industry. My shares in London-listed pan-African resources play Mwana Africa (MWA) promptly took a dive.
More fool me, you may say, for owning a stock operating in such a volatile area. Sure I take that criticism. It's a high-risk, high potential return play (or no return as the case may be!). I knew what I was getting into.
But then again, when it comes to resource stocks and utilities it doesn't seem to matter where you are.
Remember the UK's windfall tax on North Sea operators? Or the similar tax imposed on just about all the utilities companies in 1997? Oh, and then of course the government nicked Railtrack too.
The point is, it's incredibly easy to tax anything that's in, bolted to, or coming out of the ground.
If your assets are mobile then you've got a better chance of a fair hearing. Many international companies can pick and choose where they get taxed. Perhaps that gives them too much power but that's an issue for another day.
Point is, with resource and utility companies, we need to take care. We need diversification. Yes I like mining stocks. I hold a few. And some utility stocks make sense, too. They're defensive (ie not very dependent on the economic cycle) and most offer a decent yield.
BUT and I try to make this very clear here at The Right Side we need tangible assets too. Especially mobile ones. They're much harder to tax in times of stress.
A few months ago I showed you how I invest in silver and how I avoid paying VAT when I do. Incidentally, since I revealed my favoured way of picking up silver, I notice that prices have gone up! It's now rare that I can pick up silver at much of a discount to its spot price. I hope some Right Siders have been taking advantage
But it's not just silver. Gold coins, antiques and even art, wine or classic cars... these are all tangible and mobile stores of wealth. In my opinion a decent selection is always worth holding. It's a hedge not just against the financial system, but government itself.
I really have nothing against investing in resource stocks. Go for it they can make you serious gains if they pay off.
All I'd say is make sure you're well diversified. Have some of these high-risk speculations that could return many times your stake if they pay out. But be sensible about it
Only invest spare capital. Capital that you can afford to lose. And unless you've got a large diversified portfolio, you should probably try to steer clear of stocks with specific geographic focus.
I expect the resource battles to intensify over the coming years. And I expect governments to face increasing economic threats... even Western ones that have previously been considered safe.
Remember, a desperate government with its back up against a wall is a dangerous beast. Try not to get caught up in a fight with them!
This article is taken from the free investment email The Right side. Sign up to The Right Side here.
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