Oil drums and a dollar symbol of leaking oil representing the burden on the dollar by the oil markets with covid 19 virus in background

Investing In Oil During Covid 19

Is Oil Worth Investing In During COVID 19?

COVID 19 or the CoronaVirus, has caused many people to lose their jobs and has devastated many industries. Unfortunately, many people have been stuck at home due to the quarantine which has diminished the need to travel. This has negatively impacted many industries like automobile manufacturers and oil companies.

Despite this, oil could be a good investment long term and this guide will discuss whether you should invest in oil during this time.

Tread with Caution

Oil prices have declined by over 70% since January and even large companies like Royal Dutch Shell (RSD.A) and Exxon Mobil (XOM) have lost up to 56% of their value. This is a troubling sign since these larger companies have been around for decades. The West Texas Intermediate, which is the US oil benchmark, has dropped to $20 per barrel from $60 per barrel in early 2020. 

On April 2020, this benchmark has slid to record level lows at $2 per barrel! These levels have never been seen before as the lowest price that oil has been trading was around $20 per barrel. Besides a lack of demand, oil manufacturers are struggling with another problem: running out of storage. 

Large oil firms like Plains All American Pipeline and Enterprise Products Partners have required producers to provide proof that new oil shipments will have a designated buyer. The storage problem would also prompt existing producers to drastically reduce production from oil wells.

Rise in Bankruptcies

With these troubling times, it’s no surprise that bankruptcies are becoming more common. For example, Whiting Petroleum (WWL) has recently filed for Chapter 11 Bankruptcy. During these negotiations, Whiting Petroleum reached a deal that would only grant common shareholders 3% of the company. 

This shows that other types of investors like bondholders, preferred stockholders, and the like would have priority over the company’s remaining funds. In other terms, common stockholders will lose 97% of their investment and will be lucky to obtain anything from the deal! Whiting Petroleum isn’t the only oil firm to go under, as Chesapeake Energy (CHK)  isn’t too far behind. Chesapeake has been working with bankruptcy attorneys to consider drafting bankruptcy documents.

Slashed Dividends

One main advantage of investing in oil companies is that they usually pay a high dividend which can generally range from 4-6%. This is much higher than the standard 2% and oil industry titan ConocoPhillips (COP) is currently paying an approximate 5% dividend yield.

Unfortunately, many companies are cutting or even suspending dividend payments during these tough times. Household brands like Boeing (BA) and Ford (F) have suspended their dividends, have high debt levels and are in financial trouble. Occidental Petroleum (OXY) used to have an impressive dividend yield of close to 8% but has cut it to 3.23% due to the crisis.

While dividend cuts/suspensions might seem scary, there are a few ways to determine if an oil company can sustain it:

 

  • Debt loads. Be wary of companies that have high debt loads and debt to equity ratios above 1.  The debt to equity ratio is calculated by dividing debt from shareholders’ equity. This will show you if a company is mainly being financed by debt or equity investments.
  • Look for companies that have positive cash flow, positive profit margins and have cash reserves. Cash reserves will help a company stay afloat and fulfill its obligations to investors during tough times. It would be ideal to see a company increase its reserves over time.
  • Low or negative interest coverage. The interest coverage ratio is simply calculated by dividing the EBIT or (Earnings before Interest and Taxes) by Interest Expense. Higher ratios mean that companies can easily pay creditors and lenders use this to gauge a company’s financial health. Companies that have low or negative interest coverage metrics will have a hard time meeting interest payments.
  • Dividend payout ratio. The payout ratio is simply the dividend per share over the earnings per share.  Look for companies that have ratios around 50 or less as this will make it more likely that the dividend can be sustained. 

Types of Oil Companies to Invest in

It might seem risky or even downright foolish to invest in oil stocks with the current events. However, it’s possible to have solid long term investment returns with oil stocks and funds.

Some key factors to look for include:

 

  • Diversified revenue streams. ConocoPhillips isn’t just an oil buyer, but it also creates petrochemicals. Petrochemicals are used to create in-demand products like plastics, medicines, furniture, appliances, and electronics. They’re also important to environmentally conscious industries as they’re an important component of windmills and solar panels.
  • Sustainable dividends. Oil companies have higher yields than most, but what if it cuts or suspends its dividends? Be sure to look for companies that have low dividend payout ratios, manageable debt, positive cash flow, cash reserves and are profitable. It’s also important to see if the companies are mainly being financed by debt vs. equity and if they can pay their current bills.

Environmentally Conscious Firms

Pay special attention to companies that are environmentally friendly. Oil isn’t the most environmentally friendly product as oil spills can pollute the ocean and jeopardize the health of animals and humans. British Petroleum (BP) was responsible for a devastating oil spill that released over 5 million gallons of crude oil into the Gulf of Mexico back in 2010. It caused significant environmental damage and its stock dropped from $60 to $27 as a result. 10 years later and BP is still dealing with lawsuits from that incident.

Bottom Line

Things have drastically changed in a few short months due to COVID 19. Our society has never seen anything like it as countries are closing borders and even domestic flights are grounded. These factors have caused many investors to panic and look for safe havens. Others have higher risk tolerances and see opportunities in down markets.

Oil could be a good long term investment, but be sure to conduct proper due diligence before investing.

Alternatively, right now you may want to consider CFD trading within oil and do so with eToro, OIL LP English

Coronavirus outbreak and coronaviruses influenza background as dangerous flu strain cases as a pandemic medical health risk concept with disease cells as a 3D render with is gold worth investing in written

Is Gold Worth Investing In During COVID 19?

Due to COVID 19 or coronavirus, financial markets have plummeted and unemployment has skyrocketed. These events have made everybody anxious with investors desperately searching for safe places to place funds.

You might have considered investing in fixed income (i.e bonds), but these can be subject to interest rate and inflation risk. It could be wise to look at investments that aren’t susceptible to inflation, like precious metals since the government is increasing spending. Below, you’ll learn about the top reasons to invest in Gold during the COVID 19 pandemic.

Inflation and Deflation Hedge

Gold is a tangible metal that has a finite supply, unlike dollars that can be endlessly printed by the Federal Reserve. Currently, the government has lowered interest rates, offered special business relief packages, and “free” stimulus checks to help those struggling due to the COVID 19 pandemic. However, these actions will greatly increase the inflow of dollars, which leads to higher inflation.

Increased inflation will raise the prices of everyday goods and services, as this will strain the already burdened middle class. Having gold exposure will protect your portfolio as gold prices tend to rise during periods of high inflation. Gold prices have also skyrocketed around times of uncertainty like the 2008 economic crash. Per this chart below, the price per ounce rose above $1,000 during 2008 and hit 2,000 in 2012. It’s continuing to increase during this crisis as well and is currently trading around $1,700 per ounce.

What happens to the demand for gold during deflation, which is the opposite of inflation? During deflation, prices decline and economies around the world are burdened with debt. It also makes people distrust and lose confidence in their local government. Deflation was experienced during the Great Depression and in some areas after the 2008 financial crisis. People chose to hoard cash, with gold bars and gold coins being the safest places to do this.

COVID 19 Impact on Mines

COVID 19 has been extremely unique as it has closed down schools, parks, beaches and other non-essential businesses, including mines. Since mines are closed, it has become much harder to create gold bars and coins. Many investors are accustomed to investing in these assets, which are becoming more scarce and expensive due to closed mines. Many gold companies are requiring investors to pay premiums in addition to the regular coin or bar price as well.

Gold ETFs

Luckily, you can obtain gold exposure by investing in Gold ETFs. The two main types of Gold ETFs are:

  1. Those that track the price change of the metal. These investment pools either store physical gold bullion and/or have sizable gold futures contracts.
  2. Investment pools that invest in gold-related companies. Some of the underlying companies can include those that mine gold directly or provide financing to gold miners. Gold financing firms often have contracts that let them directly buy gold from the mining company at a discounted rate.

There are many gold ETFs to select from like the SPDR Gold Trust, IShares Gold Trust, and Van Eck Merk Gold Trust. Axel Merk, the founder of the VanEck Merk Gold Trust (OUNZ) ETF, stated  that “I think gold is going to go higher,” “Historically, in times of crisis people like to have gold.”

With uncertain times, inflation around the corner, and mining companies closing, he may be right.

Versatility

Unlike paper assets such as stocks, gold is very versatile. For example, it can be used to create jewelry, metals, and statues. Besides this, it’s very valuable in medicine and dentistry as well. Dentists use gold to fill cavities, crowns and create other orthodontic appliances because it’s very malleable. 

Gold also doesn’t react with other metals and won’t cause chemical reactions. It’s also very safe because it’s nonallergic, so patients won’t have to worry about any negative side effects. These traits make it a perfect resource for creating various shaped tools and fillings.

Gold has been used in dentistry since 700 B.C when pre-Roman civilizations used gold wire to repair their patients’ teeth. It was also used to fill cavities during ancient times, but its usage slightly declined during the 1970s when prices increased. Despite price increases, dentists and other medical professionals are continuously using gold for various procedures.

It’s a very valuable tool for the semiconductor industry as it carries electrical charges easily. Gold can be found in chips, computers, cell phones, and other electronics. Unlike silver, it’s not susceptible to corrosion or oxidations, which can damage entire systems.

Another little known use for gold is in aerospace, especially on satellites. Satellites float in space and it can be hard to repair these tools. So, it’s crucial to ensure that these along with other space devices are built with the highest quality materials. Gold also acts as a lubricant between mechanical parts. Organic lubricants would be broken down by the intense radiation of the Earth’s atmosphere, but Gold can withstand this.

Correlation to other investments

Diversification is key to having a stable financial portfolio as it prevents you from being overweight in one asset class. You might think that having a mix of stocks, bonds, and ETFs is sufficient. However, all of these assets can be negatively impacted by inflation, interest rate risk, credit risk, and other unseen perils.

Gold can be a great portfolio hedge as it performs well when stocks decline. This was seen as recently as 2019 when investors were fearful of heightened market volatility. Gold can be a great portfolio hedge, but it’s crucial to not invest your entire portfolio into this asset class. A good rule of thumb is to invest up to 10% of your portfolio into gold. This can include investing in a combination of physical gold and gold ETFs.

Bottom Line

These are scary, uncertain times with rising unemployment and volatile markets. Despite this, there is an opportunity to thrive and investing in tangible resources like gold can add some stability to your portfolio. It’s prudent to consider investments that won’t be significantly impacted by high inflation, interest rate risk, nor credit risk. Investors think bonds are “safe” but they can be just as risky as equities if they have mediocre credit ratings.

What do you think? Is Gold a Safe Harbor For Investors During the Pandemic? 

you can check out more concerning investing in gold, and other precious metals, at goldbroker.com one of the worlds leading providers of precious metals.

What wealth advisors are telling their clients in preparation for 2019

Click here to view original web page at www.theglobeandmail.com

 

Left to right are John De Goey, David Boyd, Joel Clark and Christopher Dewdney.What wealth advisors are telling their clients in preparation for 2019

Red might be associated with the holiday season, but this year it’s looking a bit less festive to investors.

Stock markets are down, the Canadian dollar has dropped against its U.S. counterpart and Canada’s energy sector continues to struggle, pulling down the S&P/TSX Composite Index with it. Even gold, that safe-haven asset, has taken a hit and isn’t expected to bounce back until at least the middle of 2019, according to J.P. Morgan.

Volatility is causing concern among all investors, including Canada’s wealthier, especially for those nearing retirement. Here’s what four wealth advisors are telling their clients. They also offer a few predictions for 2019 and advice for keeping sane in turbulent times.

John De Goey, portfolio manager, Wellington-Altus Private Wealth Inc., Toronto

‘Portfolios are like a bar of soap,’ John DeGoey says. ‘The more you touch them, the smaller they get.’

Mr. De Goey points out that markets have had a strong run until recently, and that managing investors’ expectations is key.

“Before this, there were a couple of dips of extremely modest consequence, but this is really the first time in almost a decade when people have seen their accounts go down. So I keep telling people, ‘You know, you’re going to have a correction every seven or eight years, and you’re going to have a drawdown every three years. You’ve gone a decade without a correction.’

“I would say the majority of my clients are fine and they get it. They understand that it’s been a good run and that things don’t always go well.

“But there will always be a moderate-sized minority – I’m going to say 15 or 20 per cent of my clients – who are saying, ‘Well, don’t just stand there, do something.’ But good financial advising is about, ‘Don’t just do something, stand there!’ You have to resist the temptation to do something just for the sake of doing it because the evidence shows that the more people tinker with their portfolios, the worse they do.

“Portfolios are like a bar of soap. The more you touch them, the smaller they get.”

David Boyd, vice-president and portfolio manager, Boyd Wealth Management Group (BMO Nesbitt Burns)

Mr. Boyd is reminding clients that a good time to buy is when others are selling.

“People look at the headlines. We’ve seen interest rates rising on the U.S. side. We’ve seen the price of crude oil down. We’ve seen the [trade] issue between the U.S. and China. I’d be naive if I said there aren’t people watching the volatility on the news and asking, ‘What’s going on?’

“Do people see this as a buying opportunity? The notion of ‘buy low and sell high’ is easier said than done. If you hear from your financial advisor who is saying, ‘I understand your accounts are down, but I need you to add some more money,’ people aren’t going to answer the phone.

“But it’s one of those things. Would you rather pay retail or wholesale? If you like to buy things on sale – which is one way to build wealth – then keep sending money because at some point in the cycle, like now, you’re going to get volatility. You can buy stuff a bit cheaper than you could in the summer.”

Joel Clark, chief executive officer and portfolio manager, KJ Harrison Investors, Toronto

If you are prepared for a market downturn, you can make hay with it, Joel Clark says.

Mr. Clark predicts a multiquarter slowdown in 2019, partly because of the popularity of exchange-traded funds (ETFs) and the use of artificial intelligence (AI) in trading software.

“It’s going to be upon us quicker than we anticipated. You can see it in the rest of the world, which is falling apart big time, and the markets are down 25 to 30 per cent. The only ‘best house in the worst neighbourhood’ is the U.S., and it’s only been break-even for the year. So our view is you’re going to have a multiquarter slowdown.”

Two factors at work here will be “this massive trend of exchange-traded funds and quants [quantitative trading that uses computer algorithms], which grew out of the last financial crisis. We’ve never gone into a true bear market with this level of AI and index type of trade. People are so long on indexes they’re not really looking at fundamentals and risk management.

“So you yell, ‘Fire!’ and it’s an instantaneous push-button effect. I worry about the market structure being able to handle a true bear market.

“But if you’re prepared for it, then you get a chance to reload. While everyone’s dying, you’re ready to make hay [by buying distressed investments]. But you’ve got to know your playbook. It’s like a football analogy: The quarterback has got a play for every scenario – and right now the playbook is cash and income [investments such as government bonds, investment grade bonds, utilities and REITs]. It’s the defence.”

Christopher Dewdney, principal, Dewdney & Co., Toronto

We’re definitely due for a haircut, Mr. Dewdney says. But diversification can help control the damage.

“There are all kinds of headwinds south of the border, which is our number one trading partner, and when they sneeze we catch a cold. But in addition to that, you have an unpredictable – and some might say irrational – president. Plus trade wars and terrorist attacks. There is a lot of instability in the market that reflects this.

“Diversification is key right now. I know that sounds like beating a dead horse, but you definitely don’t want to be the guy with all of his eggs in one basket, and then he trips. My clients have faith in the markets and economy. We sleep well at night knowing we are diversified, not just by asset class or sector, but also by geographic location.

“And we know that this too shall pass.”

oil investing

oil investment opportunities

The Different Types Of Oil Investments You Can Make

oil investing

The oil industry has many ups and down, but when you strike right, you can make a lot of money. This is why many people look at investing in oil. If you are one of these people, it is important that you know about the different types of oil investments that you can make along with the risks that are involved. There are no risk-free ventures when it comes to oil because the oil market is volatile and could turn at any time.

Buy Stocks In An Oil Company

investing in oil stocks

One of the easiest ways to invest in oil will be to buy stocks in an oil company. This is something that any investor will be able to do because these stocks are publicly traded. This investment option also offers high liquidity because of the active stock market and the active industry you are looking at.

The return on your investment will come in the form of dividends which are paid to you by the company. This will generally be a low dividend yield when compared to some other stocks and will range of 3% to 6% with a nominal growth rate. However, it is important to note that these stocks are not without risk and this will generally be a disaster risk.

Should there be a disaster with the company such as oil spills, the stock price and the dividend value will fall. Of course, with this investment option, all you will have to do is buy the stock and wait to get your return. You will also generally be able to weather any disaster by simply holding onto the stocks.

A Working Interest Partnership

Another way that you could invest in oil is by becoming a working interest partner is a drilling program. When you do this, you will go into partnership with a company that has a group of oil wells. These companies will generally be starting up and will not be making a profit off the oil wells yet.

This is a very risky investment option because you could lose your entire investment or you could strike it rich. As with all highly risky ventures, the rewards could be worth the risk, but only if you have the capacity to handle this. There are many people who do not view this type of investment as an investment at all and more of a gamble and you need to consider this.

If you do partner correctly, you could see a return on your investment of 8% to 12%. This could be a large amount of money if the oil wells hit a large reserve. However, the overall cost of this investment means that it is generally not ideal for the individual and mostly seen as an option for billion dollar companies. There is also no active trading market so you need to be in the oil industry to find this investment opportunity.

Working Interest In A Lease

If you are interested in investing in a company that is already producing oil but want something other than stocks, you can look at a working interest in a lease. This is similar to a working interest partnership, but will come with slightly less risk. The reason for this is the fact that you will be partnering with a producing oil well.

The production of the well will generally stay constant and this means that the cash flow will be easier to evaluate for your investment. The returns on your investment are also better and you could see a 10% to 20% return. Of course, this does not mean that there are no risks when it comes to this investment.

The primary drawback of this investment will be the risk of regulatory compliance. There is also a chance of lawsuits when there are accidents on the drilling site. You should also have some technical knowledge of the oil and gas industry to ensure that you understand your investment and how the company is performing.

Stocks In Royalty Trusts

Buying stocks in a royalty trust is different from buying stocks in the oil company. Royalty trusts are large assets that work on overriding interests and royalties which means that they do not have any business operations. The trust will not run an oil company and will only receive cash flow from the royalties they have purchased from the oil company.

The primary benefit of buying these stocks is the fact that you do not have any of the legal or political risks of the oil company. They also give a fairly decent return on your investment of between 7% and 9% over time. You will also have to do very little with this investment as you simply need to purchase the stocks. This is easily done because they are traded on a highly liquid market and many find these stocks to be superior to stocks in oil companies.

Buying Royalties From The Oil Owner

If you want to bypass the royalty trust, you could look at buying royalties directly from a private owner. This is not an investment option that everyone should look into because you need to understand how to buy mineral rights. You will also need to be in the oil industry or you will have a hard time finding private owners that are willing to sell.

Another serious issue that you might have with this option is the fact that it requires active participation. If you want an oil investment that you can leave once you have invested, this is not the right option for you. Of course, it is important to note that there are many benefits to this investment as well.

The primary benefit is the fact that the return on your investment can be very high. It is estimated that you could make a return of 12% to 50%. When you buy the royalties, you will also be buying the mineral which means that if another oil zone is discovered you will be entitled to another royalty cash flow.

While researching this article, we came across a very interesting website from Clarke Energy Fund Management http://www.cefmoilandgasinvestments.com/ who provide some very interesting information on oil investment opportunities. On their website they explain how rather than investing through the traditional method of one well at a time, they actually spread your capital investment across nine wells, thereby diversifying the risk. Certainly an intriguing approach.

Just like any investment opportunity, you should carry out your due diligence and research the investment before putting your money into it, but it certainly is fair to say, oil investing is not going away anytime soon.

importance of investment diversification

Why Investment Diversification is Important

In my previous post, I talked about the risk of investing crossing over into gambling; diversification is one of the best ways to prevent that from happening.

Gambling is all about putting all your eggs in one basket, betting the pot on one result, whereas diversification is about spreading the risk so that if one investment goes sour, you have other investments in other areas that can cover the loss.

One of the main keys to successful investing in starting with the end in mind. What I mean by that is, strong and successful investors know before they begin, what the outcome is that they want to achieve.  If the aim is to create an income for retirement then the fund will need to be made up of the safer assets available, like bonds, property and cash, funds that have a low loss rate. If the aim is to generate income now, or your preference is a higher risk, then stocks, options and futures etc will be a better fit.

Whatever the preference, remit or style of your investing, the key is to know what you want to do before starting, and then ensuring you don’t invest in just one area.

On my page dedicated to gold investment, I have a video of Billionaire investor Kevin O’Leary explain why he diversifies his investments and the importance of doing so.

But let me explain why diversification when investing is important.

Let’s say you were to put all your money into property development. This is something a lot of people did pre 2008 and when the housing market collapsed, their investments disappeared. Or imagine if your portfolio is made up only of stocks in the oil industry, with the price of oil continuing to fall right now, your portfolio would be looking rather depleated with no view of a recovery in sight. But if you had some of your portfolio in oil and some in renewable energy, then when one is down, the other prevents you from losing everything.

The best type of investment diversification is spreading your investments across a multitude of investment types and industries. So if you go for a mix of stocks and mutual funds or ETF’s then also diversify further by spreading them across different industry types like construction, transport, health sector and so on.

Diversification is the best way to protect yourself from mass loss. It is not a completely fool proof way, nothing is, but the more your diversify by putting your investments in many baskets compared to putting all your money  in one basket, the more you protect yourself when one basket is hit. Every person I have ever coached, worked with or talked to who lost everything, did so because they put everything into just one or two investments. Everyone who I speak to who has diversified their investments suffers the odd loss now and again, but I never see them panic, because they have that safety net that is diversification, in place.