Income From Precious Metal Investments

gold silver investment incomeIn response to popular economic forecasts, many people are considering making investments in hard assets. A couple of weeks ago, PIMCO’s Bill Gross tweeted the following message to his followers:

Gross: w/ neg real intrest rates out to 20 yrs in US bond mkt, how wl investrs maintain purchasing powr? Stocks maybe. Real assets bettr bet

Real assets do sound good to me, but the question for income investors is whether or not there are viable ways to produce reliable income from real assets. Generating income from real estate and property investments is straightforward enough since they lend themselves to rental arrangements. But what about generating income from precious metal holdings?

Gold and silver holdings are often considered dead weight in a portfolio. They provide a good hedge against currency devaluation and inflation, but they do not produce income, and their financial benefits are not realized until after the hard assets themselves are actually sold. The next best thing to owning the physical metals would be to own securities that are closely linked to the value of precious metals. Even better would be to generate income from such securities. Be aware that various hair-brained schemes (and scams) to produce income from precious metal holdings have been attempted in the past (see here for example), but these have always ended with great disappointment and tears for investors. If you are interested in trying to squeeze some income from precious metal investments, consider these two more conventional ways of doing it.

Buy Gold and Silver Mining Stocks that Pay Dividends

As experienced investors will tell you, the price of a mining company’s stock is somewhat correlated to the price of the underlying metals that the company extracts, but the link is far from perfect. My own unscientific observation is that the share prices of mining companies are much more volatile than the prices of the metals themselves. Although the prices do not move completely in step with each other, shares of gold and silver mining companies should fare well during any period of inflation. A list of dividend-paying gold and silver mining companies can be found at this site.

Write Covered Calls Against GLD or SLV

The Gold (GLD) and Silver (SLV) ETFs track the price movements of their respective metals. Although bullion purists are skeptical about the ability of the ETF price-tracking mechanisms to continue to operate properly under extreme conditions, to date these ETFs appear to be working just fine. Both ETFs are optionable, and based on the open interest volumes and the relatively narrow bid-ask spreads, the markets for their options appear to be comfortably liquid for traders. If you have the required resources, and a conservative options income strategy appeals to you, you can generate monthly or weekly income by selling covered calls against these ETFs. I don’t consider this to be passive income since it does take some work, but it is better than no income at all. As with all options investing, do your homework and make sure market conditions are favorable for your strategy before acting.

Since generating income from real assets is a topic of increasing interest, I hope to update this post in the future as I discover other possible approaches that pass my “sensible and workable” criteria.