Perhaps no other asset class is more hated than gold (except maybe emerging markets).
As inflation expectations have dwindled and global growth seems to be increasing across the board, investors have dumped the precious metal in spades. Since the beginning of last year, prices for gold have plunged from its high of around $1,900 per ounce down towards the $1,300 per ounce mark.
Gold-based exchange-traded funds (ETFs) like the popular iShares Gold Trust (IAU) have bled billions in assets, and shares of the firms that physically dig up the metal have also hit fresh new lows.
The story hasn’t been so great for precious metal silver either. Prices for the “poor man’s gold” have had a similar trajectory downward.
Yet, in all of this fleeing, there are still some valid reasons why investors might want to allocate a percentage of their portfolios to alternatives like precious metals. And given gold and silver’s recent price plunges, many investors could be thinking about adding that exposure today.
But gold investors are facing a conundrum — given the lower inflation expectations and rising global growth, prices for both gold and silver could fall more over the next year. Luckily, there is a way for investors to gain gold exposure as well as some juicy dividends.
Selling Covered Calls On Gold
Despite recent upticks in the price of gold and silver, the potential for lower prices throughout the year are still on the table. Some analysts are actually calling for gold to hit around $900 per ounce. With that in mind, many investors are hesitant about adding a swath of gold to their portfolios, regardless of the potential benefits of the safe-haven asset.
But investors can have their cake and eat it too. Writing covered-calls on gold could be the answer.
Essentially, a covered call — also called a “buy-write” option — consists of going long an underlying stock or basket of stocks while selling call options on the same underlying security. A call option gives its holder the right to buy a stock from the option seller at a certain price by a certain date.
For those investors selling the call options, the premiums generate additional income, which helps to offset some losses when markets are falling. If the markets drift sideways, that income can also be a huge boost to returns or pay for another round of gold.
Basically, investors can still be long a position in gold or silver, while hedging that position if things go wrong.
Many of the most popular and heavily traded gold and silver funds — like the SPDR Gold Shares (GLD) and iShares Silver Trust (SLV) — have options available. Investors can simply go long one of the ETFs and sell options themselves. Nonetheless, a pair of year-old funds from Credit Suisse (CS) take all the guesswork out of writing the individual options. And, more importantly, they pay hefty monthly dividends.