Tuesday, February 10, 2009
"Get cash for your scrap gold!" cried the man on the television screen.
A lady in the commercial, who was fanning herself with a stack of $20 bills, announced, "I went on vacation with the money I got."
What a great idea. After all, we all have chunks of gold just lying around collecting dust. So why not turn them in and raise some cash?
But as I was scavenging through the musty boxes stacked in the garage for my old high school class ring, a pair of gold nugget-shaped cufflinks I got from an ex-girlfriend, and a gold-plated microphone I won many years ago in a Hong Kong karaoke contest, something occurred to me...
If I exchange my gold for cash, then I'm losing my hedge against inflation and all I'm gaining is pieces of paper that will eventually be worthless.
Of course, right now, I can take those pieces of paper down to the grocery store and buy a gallon of milk and a loaf of bread. So far, the folks at the local Piggly Wiggly haven't been all that keen about swapping food for my old dental fillings. Well, at least not yet.
And that is the problem with owning precious metals... They don't create cash flow.
You can buy a bond and get interest, buy a stock and get the dividend, or even leave the money in a savings account at a bank and still get something. Precious metals, on the other hand, don't earn anything.
This presents a problem for retirees, people living on a fixed income, and investors who just want to get paid something for owning an asset. Precious metals provide a hedge against inflation and against a drop in the value of the dollar. But they don't generate any income.
Unless... you get a little creative. That means selling covered call options. Let me explain...
A few weeks ago, I told you 2009 would be the year of the precious metals. I told my Advanced Income subscribers the same thing back in October. Since then, we've generated a 27% return in four months selling calls against Yamana Gold, a 41% return in two months selling calls on Hecla Mining, and a 13% return in just one month off an investment in a silver exchange traded fund (SLV).
The neat thing is none of these stocks have gone up all that much. Nearly all the gains have been from selling covered calls against the shares.
We're holding on to our precious metals investments. Yet we're still generating huge cash flow. It's the best of both worlds. And it's a way to turn an ordinary, conservative investment into an income-generating machine.
Best regards and good trading,
A recovery for Internet stocks… Amazon, Yahoo, and Google near three-month highs.
Regional banks still falling... SPDR Regional Banking ETF down 48% from 2008 highs.
Gold falls below $900 an ounce on news of smaller-than-expected government stimulus.