USA Vs. Russia - This Gold Security Is Your Trump Card

Rhetoric between the U.S. and Russia ahead of a possible confrontation in Syria has precious metals and relative securities getting a bid.

There are various ways to play or to hedge against the event for various scenarios and according to investor risk tolerance.

I believe the safest bet today is the SPDR Gold Trust, as it should benefit from fear but not cost us too much if rhetoric fails to materialize into confrontation.

As western powers prepare to strike at Syria, and Russia states it will defend its ally, precious metals have my attention. But if you're making short-term moves based on the current event, whether opportunistic or defensive posturing, your safest bet is probably the SPDR Gold Trust (GLD) security. While other securities provide greater leverage and will do better if the situation escalates or lingers, the GLD will serve its purpose while also limiting your risk should rhetoric not evolve into a truly terrifying tangle. It also trumps illiquid physical gold for as long as an apocalyptic outcome does not materialize.

GLD Price data by YCharts

USA Russia Confrontation is Concerning

While it's unclear if rhetoric will translate into a serious confrontation between the world's two nuclear rivals, the rhetoric is terrifying. As such, precious metals and relative securities were getting a good bid Wednesday morning. So what is the best way to play or to hedge risk against this event today?

The Situation

Western powers, led by the United States, seem to be clearly preparing for a strike on Syria in response to an apparent Syrian government chemical weapons attack on the Syrian people. In fact, the strike on Syria may have already occurred ahead of this article's publishing. Military assets are in place, airspace is clear, and targets are likely chosen.

The problem is that Russia is strongly standing behind its ally in the Syrian regime. Russia has vowed to defend the Assad regime against U.S. missiles, and more importantly, to target their launch sites as well. Their launch sites will likely include U.S. warships in both air and sea. So what happens if Russia fires upon and/or strikes a U.S. destroyer or aircraft fighter/bomber? Whatever happens, it won't serve the U.S. dollar nor U.S. equities. However, it would serve volatility and the precious metals complex.

Ways to Play the Event

There are various ways to play the event. A former equity analyst, I'm not an expert on options investing, and I do not feel comfortable so advising, so my focus here is on equity securities. Within that limitation, there are various ways to play the event depending on what scenario you see most likely playing out and on your tolerance for risk.

Extreme risk takers or those looking for a strong short-term hedge to their risky portfolios might buy volatility. But securities like the iPath S&P 500 VIX ST Futures (VXX) are already somewhat elevated against already rocky equity markets. Still, the VXX and others like it could climb significantly higher in a bad case scenario; a doubling is not out of the question if Russia and the U.S. end up firing at and/or striking one another. And yes, that means a stock market correction is in the realm of possibility. Unfortunately, I currently hold a very small short position on the VXX established at an earlier date. But fortunately, this is not the most likely scenario.

So what if rhetoric does not play out into anything substantial. Our normalcy bias would tell us that this is the most likely scenario, despite the scary rhetoric we're hearing out of Russia. In that case, equities would probably quickly recover relative losses and volatility instruments would backtrack, and possibly sharply.

For this same reason, risk-averse investors might avoid the temptation of buying levered precious metals relative securities like the Direxion Daily Gold Miners Bull 3X ETF (NUGT). It also would quickly reverse should rhetoric not evolve into tangible conflict.

The VanEck Vectors Gold Miners (GDX) and the VanEck Vectors Junior Gold Miners (GDXJ) ETFs are interesting if you believe tensions will linger or escalate between the two nuclear superpowers. I suggest this because miners' gains will reflect the sustainability of elevated gold and silver prices, and those prices will not likely stay elevated if the geopolitical tension dissolves relatively quickly.

For this reason, the safest way to hedge your risky portfolio, and also not go out on a limb predicting World War III, is adding the SPDR Gold Trust GLD to holdings. It will reflect any appreciation in the price of gold, which should counter any decrease in the value of the U.S. dollar and risky assets on concern about relative risk.

Why Not US Treasuries?

In this case, U.S. Treasury securities should not be the destination in a flight to safety, because in a confrontation with Russia, the U.S. is not a safe place of domicile for human beings or government debt, however short-term it may be.

Why Not Silver Over Gold?

While silver should appreciate along with gold and relative securities in a bad geopolitical scenario, I do not favor silver investment over gold or relative securities. The reason for that is because quick capital will first look to gold for safety, especially while its price is not considered inflated by a good many investors, in my view. I look to silver at times when gold has already appreciated significantly, and while it is still supported, but while silver has lagged. Silver is, in my opinion, second choice, and draws capital best when gold valuation is somewhat in question after a good run higher.

In conclusion, with unknown outcomes in play; a normalcy bias to go by; and good reason to avoid conflict between nuclear superpowers, though while needing a hedge against relative risk, the SPDR Gold Trust GLD seems to me to be the safest bet. Take note that I would suggest exiting the position if geopolitical tensions ease, as U.S. economic strength remains a stubborn headwind. For all my work on markets, asset classes and securities, readers are welcome to follow the column here at Seeking Alpha.

Disclosure: I am/we are short VXX.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: My position is via options.