Here’s How to Profit from the Biggest Problem with Gold

Commodities Investing, Funds, Options

Using gold as a portfolio hedge or safe-haven investment is often a point of contention among investors and analysts. There are highly respectable investment gurus who love gold and what seems like an equal amount who hate it. Gold definitely has the feel of a binary sort of investment, you either love it or hate it.

Those who love gold talk about its staying power. Gold has been a store of value for over 5,000 years, they say. You can actually get access to physical gold and store it in your own vault. Central banks even buy gold during periods of uncertainty.

During tumultuous periods, we often see gold rise in value. Heck, it almost hit $2,000 per ounce after the 2008-2009 financial crisis.

Of course, gold is a scarce resource and there’s a limited amount of the precious metal on the planet, something else the gold bulls like.

On the other hand, holding gold costs money – especially if you hold physical gold yourself. Naturally, you can always buy something like the SPDR Gold Shares ETF (NYSE: GLD) to diversify and protect your portfolio if you believe gold is a good hedge.

But there’s one big problem…

Gold has no cash flow. It doesn’t pay dividends, there won’t be any stock buybacks, and you won’t see any upside earnings surprises.  One solution is buy gold mining companies. But then, you introduce a whole new set of variables. Most people don’t want to be gold experts and also have to understand the nuances of the mining industry.

Well, I have an even better solution for those of you who like to own gold but love the idea of it generating an income. How about buying GLD and writing calls against it?

In fact, just this week there are several gold GLD covered calls trades hitting the wire. One covered call buyer sold 2,000 GLD July 133 calls for $1.33 against long shares at $126.73. The 2,000 short calls implies the seller is long 200,000 shares of stock.

By selling the calls against long GLD shares, the covered call trader is collecting $266,000 in cash. That $266k will either be income on the trade if GLD stays where it is or moves higher, or it will be a hedge against a partial down move if GLD drops. In the meantime, the trader can share in about 5% of gold’s upside should it rally.

One day later, a similar trade (possibly the same trader) occurred in GLD. This time 4,000 July 131 calls were sold against 400,000 shares of GLD at $127. The calls were sold for $1.95 so the trader collects $780,000 in this case. However, on the long side, he or she can only share in about 3% of gold’s upside.

In other words, this covered call collects more income than the previous trade but doesn’t have as much upside on the long stock side. I think either trade is a good one. It just depends on if you want to generate more income from the calls or have more upside in the stock.

If you want to have gold in your account as a hedge and you want to generate income, I strongly recommend one of these two trade strategies. But don’t forget, you need to own 100 shares of GLD for each short call in order to be fully protected in a covered call trade.

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