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.

forex options trading

What Are Forex Options And How To Trade Them

Forex Options – What Are They And How Are They Traded?

The foreign exchange (forex or FX) options market has grown to become the world’s largest and most liquid market. It shares many similarities to other options markets, but with a few key differences that make it enticing to small investors and large companies alike. In the following guide, we’re going to look at what a forex option is, what are the benefits of trading them, and how trading occurs.

What Are Forex Options?

A forex option, also referred to as a currency option, is a type of flexible contract that a buyer may enter by paying a premium. The contract gives the buyer the right to trade currencies at a determined rate prior to a determined date. The major advantage is that the buyer has the right to make this exchange, but he is not obligated to do so. This makes options a powerful tool for hedging against uncertain shifts in currency exchange rates.

In traditional options trading, the buyer has the right to purchase or sell a specific commodity before the given date. The same rules and processes apply to FX options trading, except that the asset being purchased or sold is another currency.

As mentioned previously, FX options are often used by large companies to offset potential losses that occur due to fluctuations in used currencies. Options are often used in this regard alongside currency forward contracts. Currency forward contracts guarantee a trade at a specific rate on a specific date. They are used to hedge against certain shifts. Meanwhile, options require no obligation and are thus used to hedge against uncertain shifts in the future.

The Types Of FX Options

To know how to trade options you need to first understand each type of option. Some of these terms you may be familiar with if you have traded currencies or options in the past. There are three main types of FX options and they are fairly simple to understand.

The first type of option is a call option. This gives the investor the right to buy a pair of currencies at a determined exchange rate. The right will need to be exercised on or before a specific date.

The second type of option is the put option. This contract gives the investor the right to sell currency pairs at a determined rate before a specific deadline.

The third type of FX option that is frequently used is called Single Payment Options Trading (SPOT). SPOT options are sometimes referred to as binary options because they have two possible outcomes. The investor will provide a scenario and the broker will charge a premium based on the likelihood of that scenario occurring. The SPOT option will then pay out if the determined scenario occurs.

Above is one of the two possible outcomes of a binary forex option. The second outcome is the scenario listed does not occur. In such a case, the investor will lose the premium that was paid for the option. SPOT trading has become extremely common with new investors because it is easy to understand and has a significant potential for profit.

The apparent simplicity of SPOT trading is actually deceptive. It’s true that each option only has two possible outcomes, but the number of potential scenarios is very high. Once traders begin considering all of these scenarios they can easily become overwhelmed. However, there are various tactics for SPOT trading that are meant to make the prediction process easier.

Two Easy Ways To Trade SPOT Options

If you are interested in forex SPOT trading, then there are two simple scenarios that you should familiarise yourself with. These scenarios make it easy for newcomers to make predictions and thus make a profit. The first is known as a “one-touch spot” and the second is called a “no-touch spot”. Each strategy reflects a predicted change in an exchange rate.

With a one-touch spot, you are predicting that an exchange rate will reach a specific level before a given date. If the exchange rate does reach that level before the provided date, then you receive payment. The value of the payout is determined by how long the options contract is set for and the difference between the current exchange rate and the predicted exchange rate.

Generally speaking, one-touch spot options do not have very high payouts. They are still an attractive option because of their simplicity. It’s a great way to begin trading forex options if you are a newcomer.

The second option is the no-touch spot. This is simply a prediction that an exchange rate will not reach a specific level prior to an expiration date. Once again, the value of the payout is determined by the length of the contract and the difference in the values of the exchange rate. The payout is not very high for no-touch spot options either.

The one-touch and no-touch spot options are some of the most commonly traded options with newcomers. Not only are they easy to understand, but they serve as powerful learning tools. Many great investors took their first steps into forex options with the one-touch spot. As you spend more time trading you will become more comfortable with forex options and be able to predict more specific scenarios with much higher payouts.

Should You Trade Forex Options

If you are already familiar with traditional forex trading, then stepping into the FX options market may seem like a natural step. It is a great way to diversify and to hedge against specific risks. Your existing knowledge of the currency market will be beneficial when trading options and what you learn while trading options will benefit your traditional forex trading.

And what if you don’t have experience with the forex market? Trading options is actually a great way to introduce yourself to the market. SPOT trading, in particular, is an easy-to-use tool for learning the market while making a small profit. That profit will continue to expand as you learn more about the complexities of trading different types of forex options. In any case, it’s important that you continually strive to learn more so that you can make more accurate predictions in the future.

Always remember: Your capital is at risk because trading of any kind carries a high level of risk, and may not be suitable for all investors.

If you are interested in Forex Options trading then you should check out IQ Option

Please Note: As Of 2nd July 2018 Binary Options Are Prohibited Within The European Economic Area (EEA) For Retail Traders. If You Live Within The EU And Are Not A Professional Trader You Will Not Be Allowed To Trade Binary Options.

General Risk Warning:

Financial products & trading carry a high level of risk and can result in the loss of all your funds. You should never invest money that you cannot afford to lose