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Political risk is probably one of the biggest dangers that investors and speculators don’t see coming. It’s the one that comes out of the blue and blindsides your portfolio. What is political risk? Political is a reference to politicians who, in turn, run government. As far as you and I are concerned, political risk and governmental risk can be synonymous. In other words, politicians are Dr. Frankenstein, while government is Frankenstein’s monster. The bottom line is that political risk means that the government can change laws and regulations in a way that can harm your investment or financial strategy. This can happen in your own country or by another country.

Consider what happened in the 1930s right here in the United States. In 1934, Franklin D. Roosevelt (FDR) and Congress passed the Gold Reserve Act, which made gold ownership illegal. Had you bought gold in prior years to preserve your wealth in the midst of the Great Depression, well, you were now out of luck. FDR then issued a presidential order fixing the price of gold at $35 an ounce, which stuck for decades to come. FDR didn’t want private citizens to have an alternative outside of the official paper currency.

Fast-forward to current times. Political risk is alive and well (unfortunately). In many countries, such as China and Venezuela, the government nationalized (taking private property by force) properties by foreign companies — among them, mining companies. Had you owned stock in these mining companies, you would have seen the share prices drop. Sometimes the share prices drop at the mere threat of government action. In 2005, for example, the Venezuelan government mentioned that it may take property owned by the Toronto-based gold mining company Crystallex International. Its share price fell by a whopping 50 percent in a single day. Venezuela’s dictator Hugo Chavez did increase taxes on many foreign companies while nationalizing some industries.

That’s the problem with political risk. As an investor or speculator, you can do all your homework and make a great decision with your portfolio backed up by great research and unflinching economic logic and still lose money because of a government action that could have been unforeseen.

An ounce of prevention is worth a pound of cure. It’s best to stay away from investments (such as mining companies) that are too exposed to risk in a politically unstable or unfriendly nation. There are still plenty of precious metals opportunities in politically friendly environments such as the United States, Canada, Australia, and Mexico (at least until the next election!).