True Investments vs. Speculative Trading in Gold & Oil
Courtesy of Chris Vermeulen
A couple of weeks ago I was listening to an hour-long segment on CNBC with Warren Buffett. He brought up a great point about the type of investments he prefers and the difference between an investment versus a speculative trade.
Buffett stated that he prefers to hold an investment which is earning money and generating cash flow. Meaning he prefers to own equities of companies which generate income for its shareholders versus a commodity which does not generate any revenue.
While Mr. Buffett said that gold is a commodity everyone should own some of, he also clearly stated that buying a commodity in hopes that someone will pay you more for it later is purely speculative. Would you rather own something that paid you monthly or annually a cash dividend or something that might go up in value, but may also lose value?
Investors and traders are primarily focused on purchasing gold stocks, physical gold via ETFs, gold bars and coins. None of these provide income the holder. But after doing some in-depth research I have found another way to invest in precious metals and commodities that will not only give you exposure to the gold, silver, and oil sector but it can also generate a monthly income stream to your portfolio.
Through Gabelli closed-end funds like the Global Gold, Natural Resource & Income Trust (GGN), or Natural Resource, Gold & Income Trust (GNT) you can get the best of both worlds.
Each fund is currently providing a 10% annual dividend paid out in monthly distributions. Both funds' primary objective is to provide a high level of current income. The funds' secondary investment objective is to seek capital appreciation consistent with their strategy and primary objective. Under normal market conditions, the funds will attempt to achieve their objectives by investing 80% of their assets in equity securities of companies principally engaged in natural resource and gold industries, and by writing covered call options on the underlying equity securities.*
With the US stock market slowly nearing a bull market top and with commodities trading at multiyear lows, I think we will eventually see a shift in money flows out of stocks and into commodities. With rising commodity prices, resource based stocks should start a new bull market that will send these funds dramatically higher in value while still paying dividend income.
In conclusion, if you want to invest in precious metals long-term, I think owning an income strategy based around that investment is a great way to add diversification and income to your portfolio. Learn more about trading ETFs, funds and copy every trade I place with my own money here.
Disclaimer: I currently own shares of GGN
*A “covered call” is an income-producing strategy where you sell, or “write”, call options against shares of stock you already own. Typically, you will sell one contract for every 100 shares of gold or oil stock. In exchange for selling the call options, you collect an option premium.
