Update: Income from Gold and Silver

investment income from precious metalsHere’s an update to the post I wrote last August on Income from Precious Metal Investments. In that post I mentioned that one possible strategy for deriving income from gold and silver was to write covered calls against investments in GLD and SLV. Well, it looks like someone else was thinking the same thing.

Since October 2012, gold and silver prices have gotten hammered (I wonder what Ron Paul’s portfolio looks like now!).  During this negative environment for precious metals, Credit Suisse launched a couple of exchange-traded notes (ETNs) that employ a covered call strategy to provide an income yield for underlying gold and silver holdings. GLDI was launched in January with a strategy to sell covered calls against GLD, and SLVO was launched in April to do the same for SLV. Although performance of these ETNs has been less than stellar so far, these products are still new and probably worth watching as possible investments for income.

My personal view is that these products are still unproven, and their risks should be considered carefully by potential investors. In addition to the concern I mentioned in the previous post about GLD and SLV being able to accurately reflect the price changes for the metals in all market conditions, there is also the uncertainty of Credit Suisse being able to back up the ETNs in all market conditions. I’m also a little concerned that the timing of these product launches may not be the best. Covered call strategies that involve selling and then buying back out-of-the-money calls from month to month are usually optimal when the prices for the underlying securities are flat or slightly bearish. In times when prices are rising significantly, the strategy gets tricky. Simply owning the underlying securities and foregoing the call income would usually maximize overall returns in a bullish situation, but of course then you would receive no income.

Over the past month (May 2013), we’ve seen long-term interest rates starting to creep up. If this turns out to be a precursor to the long-awaited inflationary cycle, then a covered call strategy for precious metals may not be the best strategy to pursue right now since gold and silver prices would also be expected to rise substantially. If, on the other hand, you believe that prices for gold and silver will remain relatively flat for some time, then these ETNs may prove to be smart investments for your income portfolio.

2 comments

  1. It’s mid-June and gold prices are still falling with no bottom in site. Maybe the covered call strategy is a smart one after all.

  2. Just revisiting this idea with 20/20 hindsight. Looks like GLDI did outperform GLD by 3 basis points in 2013 – not too exciting, but not too shabby either. GLDI is up about 9% year-to-date and is yielding about 11%. I’m tempted.

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