23/02/2011 - 08:55

Analysis: how to profit from Libya chaos

23/02/2011 - 08:55

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As the Middle East collapses into its latest bout of instability there are lessons to be learned by investors and managers. Investors should be buying gold and energy stocks, managers should be reviewing business succession plans.

Analysis: how to profit from Libya chaos

As the Middle East collapses into its latest bout of instability there are lessons to be learned by investors and managers. Investors should be buying gold and energy stocks, managers should be reviewing business succession plans.

All three lessons appear simple to follow, though it is equally true to say that each generation of investors and managers ignore them, and then go through a process called "reinventing the wheel".

Take gold. In its pure metallic form it is virtually useless, except as a body adornment, paperweight, or in curious scientific and dental applications. That's why non-believers dismiss gold as an historic relic doomed to become a fossil.

What the non-believers miss every time with gold is that it remains one of the few universal stores of wealth. It is not a government-issued IOU such as a $50 note which can be quickly debased by the government accelerating its printing presses as happened in Germany in the 1920, and Zimbabwe more recently.

Next round of the inflation game will be the discovery by governments around the world that their economic stimulus spending to ward off the global financial crisis was merely a transfer of debt from the private to the public sector and the only way to get rid of that newly-acquired debt is to inflate it away by printing ever-more money.

Lesson 1: Have some of your portfolio in gold, like all central banks, and get ready for a serious bout of inflation as governments "retire" their debt by repaying it in debased currency.

Energy is an even simpler lesson. The world wants it, will pay for it, and despite attempts by the environmental movement to demonise coal, oil, gas and nuclear power the world is going steamroll over the top of those objections.

For Australia, civil wars in the Middle East make for unpleasant television viewing, but they also remind the rest of the world that if you want a reliable source of energy then Australia is the place to do business, and has the full inventory of energy for sale.

Closure of Libya's oil refineries, which account for less than 2 per cent of global oil production, is another reminder, of the fine balance in world oil production. If more oil-producing Arab-dominoes fall then the price of oil will skyrocket - killing the embryonic global recovery, but enriching all producers of energy.

Lesson 2. Have a large portion of your portfolio in high-quality Australian energy producers.

Management consultants will dine out on the third lesson for years -- what happens when succession planning is ignored?

At a country level, such as in Libya today, the result is utter chaos. The dictatorship of Moammar Gadaffi is going the way of all dictatorships which eventually fail because there is only room at the top for one ego.

Companies and families can be guilty of the same lack of planning with the people in charge today confident that they will either (a) live forever, or (b) believe they are better than anyone under them - or both.

Problems generally start when an undisputed leader enters his 70s, and are on full display by the time he reaches 80. Zimbabwe's Robert Mugabe is a prime example, but there are plenty of rich men in charge of companies today that really ought to be thinking hard about succession planning.

The real challenge for those in power, whether in a country or a company, is to acknowledge their own mistakes, and since most believe themselves to be infallible that rarely happens.

So, for investors there is a clear pathway to profit from what's happening in the Middle East. For management consultants and university lecturers there is enough raw material on the importance of succession planning to fill several books and re-stock their wine cellars

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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