How would you like to be paid to own gold?
Of course, you would.
This idea seems particularly attractive in light of the market's recent selling pressure. And I am not talking about any complex option strategies or anything illegal. In fact, it's a brand-new exchange-traded note (ETN) that does everything automatically.
Is there risk? As with any investment, certainly. But here's the right question to ask: Does this make sense for your portfolio?
Let's take a look at the big picture behind this intriguing new ETN...
The most fervent gold investors, or "Gold Bugs," say gold is the ultimate investment. And the truth is that Gold Bugs have been laughing all the way to bank since 2005, when gold rocketed more than 280% to $1,910 an ounce in 2011.
Everyone was in a frenzy then. Physical gold buyers opened up shop on nearly every street corner wanting to buy your gold jewelry and scrap gold to melt down for a fast profit. Central banks jumped on the bandwagon, ramping up their holdings. Investors followed, setting records for demand.
Interestingly, most of this occurred after gold hit its 2011 high.
Despite the price decline since then, central banks across the globe have been on a buying spree, purchasing more than 534 tons of the yellow metal in 2012, according to the World Gold Council. This amount of concerted buying has not been witnessed in more than 50 years. Various structured products such as ETNs and exchange-traded funds (ETFs) have been designed to meet the demand of stock investors who want a piece of gold's profits.
GLDI provides investors with notional exposure to the bullion ETF SPDR Gold Shares (NYSE: GLD), while notionally selling monthly "out-of-the money" call options. In other words, it's an ETN based on the time-tested covered-call strategy of creating income.
The ETN is designed to earn monthly premiums from the call's sale. In exchange, the investor gives up gold price gains above 3% a month. The call premiums earned lessen any losses should the underlying GLD ETF experience a loss.
However, that's as much as one can expect regarding downside protection with this ETN. GLDI has an expense ratio of 0.65%, which is much higher than the 0.40% offered by GLD, but the returns are expected to cover the higher costs.
Because this is a new product, it's impossible to judge its success. Credit Suisse's back tests during the past year indicate GLDI would have returned a 9.45% yield with high monthly volatility.
This ETN makes the most sense if you are neutral-to-slightly bullish in gold. If you are bearish or strongly bullish, then this ETN isn't your best choice. If you love gold as a stable investment, but only wished it had yield, then there is a strong case for owning GLDI.
Risks to Consider: Other than the market risks of gold crashing, structure is this product's primary risk. Unlike an ETF, an ETN is exposed to the credit risk of the issuer, in this case, Credit Suisse. If Credit Suisse declares bankruptcy, then the ETN investors could see their entire investment wiped out. In other words, ETN holders are betting that the issuer stays solvent, as well as the movement of the underlying financial instruments. It's critical to remember GLDI is a brand-new product without any historic performance.
Action to Take --> This ETN is a compelling investment for those bullish on the yellow metal. If you are neutral-to-slightly bullish on gold, then it makes sense to dedicate a portion of your portfolio to GLDI. However, if you have a strong bias in either direction, then it's far from your best choice, even with the premium yield.