Looks like oil companies won’t be in a slump for long. When word got out that U.S. rates will be hiked only twice this year, the dollar slumped while crude prices rose — and there’s a good possibility that the latter will go even higher.
For one, experts agree that oil prices have reached their lowest point. Outside the Organization of the Petroleum Exporting Countries (OPEC) comprising Saudi Arabia, Kuwait, Iran, Iraq and Venezuela, production dropped by 750,000 barrels/day — 150,000 barrels lower than last month. Even the OPEC countries are experiencing a supply disruption.
In other words, food and energy inflation are in the stars, but that’s not necessarily bad for investors. If you play your cards right, you can make money regardless of current CPI or crude price levels.
Invest Directly Into the Source
It’s easy to put your money into oil producers like Chevron, BP and ExxonMobil. They’re only a few clicks away, after all. The problem is, these companies incur a ton of costs — transportation, equipment, salaries — that are only indirectly related to oil, but they still chip into their profitability. So what’s an oil investor to do?
The answer is invest in gas drilling projects. Because these projects are closer to the source compared to the bigger companies, it’s easier to track where all the money goes. Granted, there have been instances of scammers who take advantage of potential investors, but you can take steps to protect yourself from them.
Hedge With Physical Gold and Silver
Since commodity prices are going up, it makes sense to invest in grocery stores like Wal-Mart, Costco and Target, right? Not necessarily. These companies have dangerously thin profit margins during inflationary periods because of inefficiencies, cash flow problems and over-leveraging.
Instead, hedge against inflation with gold and silver. Precious metals increase in value during inflation, and they’re an essential raw material for jewelry, transportation, electronics and other valuable technological innovations.
Do Away With Bonds
In general, bonds are a bad investment during inflation. Bond prices go down when interest rates go up, and vice versa. If you own Treasury bonds in particular, these are the hardest hit by inflation, so let go of them ASAP.
There’s an exception to this rule, though. The so-called Treasury Inflation-Protected Securities (TIPS), for example, incorporate the CPI into its calculation of interest and principal payments. While it’s not completely foolproof against inflation, it’s your best bet if bond investing is in your wheelhouse.
Consider Small Cap Stocks
Not all stocks are created equal. For example, small-cap stocks have a market capitalization between $300 million to $2 billion. They’re also riddled with larger amounts of debt, which often gets cut down thanks to inflation.
In effect, their value goes up when the CPI spikes. So if you plan to invest in stocks come inflation time, look no further than small-cap stocks. To start with, check Morningstar’s list of small-cap stocks to fight inflation.
Many business publications say that an oil price inflation is unlikely — but then, very few people saw the 2007-08 financial crisis coming, either. Why take chances when the slightest possibility of inflation exists?