Iran Tensions: Protecting Your Portfolio (Part 1)

Escalating tensions between the United States and Iran pose an increasing risk to economic stability and to financial markets. Yet for investors who think through the implications, that risk brings opportunities as well.

The Blame Game: Tensions have been building for some time over Iran’s nuclear program, with talk of sanctions, or even military strikes, if an agreement cannot be negotiated. A recent suicide bombing in Sarbaz in southeastern Iran, which killed five members of the Revolutionary Guards at a conference of Sunni and Shiite groups, has further inflamed the situation, with Iran attributing blame to the United States.

Oil as a Weapon: Whenever a country buys oil, it has to use the U.S. dollar for the transaction. This creates ongoing demand for the greenback, which produces several economic benefits for the United States. But Iran, as one of the world's largest oil producers, may try to move world oil markets away from the U.S. dollar. Iran can start asking Euros for its oil, which would reduce the demand for the U.S. dollar. That would be yet another blow to the dollar’s status as the world’s reserve currency, with three key investment implications:

Implication 1 - U.S. Dollar: The shift away from the U.S. dollar will cause the dollar to weaken relative to the currencies substituted for it. That will primarily be the Euro, but the Yen, and possibly the British Pound would also benefit relative to the U.S. dollar. Ways to profit from this trend include the Euro Trust ETF (FXE), Yen Trust ETF (FXY), and US Dollar Index Bearish Fund (UDN).

Implication 2 - Interest Rates: The decreasing willingness of the rest of the world to hold U.S. dollars implies that the U.S. Treasury’s cost of borrowing – i.e. interest rates – will rise. Ways to invest in this trend include the Ultrashort Lehman 7-10 Year Treasury ETF (PST) and the Ultrashort Lehman 20+ Year Treasury ETF (TBT).

Implication 3 - Gold: The other traditional hedge against dollar weakness is gold, which can be purchased via the SPDR Gold Trust ETF (GLD) or the ETFS Physical Swiss Gold Shares ETF (SGOL).

In part 2 we'll be discussing the risks of military action.

1. Chinese Companies Profiting From Iran: State-run Chinese companies are selling gasoline to Iran, and some analysts have suggested that this move could undermine U.S. efforts to halt Tehran's nuclear program. Use the List Snapshot to analyze these companies (free registration required to view the link)

2. The Falling U.S. Dollar: Escalating tensions between Iran and the U.S. may increase the volatility of the U.S. Dollar. Use the Turbo Chart tool to evaluate the performance of the Euro and Yen funds.