What to buy as revolution spreads in the Middle East

published 22 February 2011

"We are not afraid any more. Death is going to come anyway. It will come in the road or it will come in the bed. Enough is enough."

Those are the words of a Tripoli resident, quoted in the FT's front page story on the uprising in Libya.

You'd have to have a heart of stone not to be moved by that. I don't know about you, but if I was a dictator in any other nation on the planet right now, and I knew my citizens were reading and hearing those words and others like them, I'd be packing my overnight bags.

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But how does it affect you? I'll get to the point. This revolution like subprime, like the eurozone debt crisis has gone beyond the point where it can be easily 'contained'. That means investors will have to start planning for its impact.

So what should you do?

The world is an uncertain place at the best of times. I'm sure that with hindsight, history will deem that the current situation in the Middle East and North Africa (MENA) was bound to happen, just as the collapse of the Soviet Union is now seen as inevitable.

But as far as I'm aware, no one in the investment world saw Tunisia coming. And after Tunisia fell, everyone said the same thing couldn't happen in Egypt Hosni Mubarak had too tight a grip on the military. And even after that was proved wrong, I suspect most people would have bet on Gaddafi easily crushing the uprising in Libya.

Now the markets are realising that the whole MENA region could be up for grabs. Protests are erupting everywhere from Iran, to Morocco, to Sudan. And oil prices are spiking over fears of disruption to supply.

The effects of revolution in the Middle East on oil markets

As Lex points out in the FT, 'regime change' shouldn't necessarily matter to oil production. Regardless of who's in charge, oil is the main source of wealth for these countries. And between them, Libya, Egypt and Tunisia only account for around 3.4% of global oil production.

But of course, it's never as simple as that. Just because it's in a nation's best interests to keep the oil flowing, doesn't mean it will happen. If foreign companies are evacuating their employees for fear of civil war, then production is going to be disrupted, like it or not. And you can never be sure of how a new regime might want to play its hand. Oil isn't just a source of money, it's a source of geopolitical power and influence too.

And then there's the fear over what might happen if the unrest spreads to more critical oil producers. Iran, Syria and Algeria account for about 8% of global production between them. The daddy of them all, Saudi Arabia, accounts for 12%.

As Win Thin notes on the creditwritedowns.com blog, "Markets have always relied on Saudi Arabia to act as the swing producer, boosting output if supplies were disrupted elsewhere". It can cover disruption to Libya, but Iran's output of 3.7m barrels of oil a day "is too large for even Saudi" to replace right now. And what if Saudi itself sees an uprising? I wrote about oil at the end of last week. For more, see: Oil is a threat to the global economy and a big opportunity for investors

I haven't even mentioned Israel yet. The country is surrounded by hostile governments. Its allies in the region are being overthrown, while the West is sitting uncomfortably on the fence. Depending on how the cards fall in Iran specifically, it may feel the need to take matters into its own hands. Then we'd have a crisis on a whole new scale.

And still further beyond that, where might other oppressed citizens be reading or seeing people in Libya stand up to a Teflon dictator like Gaddafi, and thinking: "Enough is enough"? The Chinese are taking it seriously. A half-hearted call for a "jasmine revolution" in the country saw the internet censored and text message services blocked.

So what can you do?

No doubt there will be plenty of trading opportunities as the market becomes more volatile and you can learn more about trading strategies by signing up for the free MoneyWeek Trader email. But for longer-term investors, I think this upheaval is one more reason why it's a good idea to have some gold in your portfolio.

There are many reasons that you might want to buy gold. But as my colleague Merryn Somerset Webb put it on Twitter yesterday (you can follow her here), we've always seen it as insurance. Gold is the asset you want to be holding when things go pear-shaped. By and large, when the rest of your portfolio is in the doldrums, gold will be doing well. And if your gold is falling in value, well, hopefully that means that better days lie ahead for most other assets in your portfolio. You can learn more about how to invest in gold here: A beginner's guide to investing in gold.

The other monetary metal is gold's sister, silver. I wouldn't describe silver as portfolio insurance in the same way that gold is it's rather too volatile and influenced by industrial demand. But it has been going wild over the last few days. My colleague Dominic Frisby will be looking at the action in the silver market in tomorrow's Money Morning don't miss it.

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John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.