Although the strength in domestic U.S. equities have primarily
been held responsible for the weakness in gold, the fact remains
that there are not many catalysts that hint towards a massive surge
for the yellow metal in the near term.
Actually, with consideration to the present scenario, the
optimism and excitement in the equity markets make for
more enticing play than the safety offered by gold.
Furthermore, with the monetary base of the economy expanding at a
solid clip (along with the Fed balance sheet), inflation is also
expected to remain subdued in the near term (see Time to Buy this Precious Metal ETF? ).
Unless, of course, the 'reserve' money is actually circulated in
the economy as a measure that will continue supporting the economy
even after implementing an exit strategy of the monetary easing by
And clearly, the exit strategy of the Fed isn't taking shape
anytime soon. Therefore, the hedge against inflation play for the
precious metal could also be unappealing, at least in the near term
(see Long-Term Treasury Bond ETF Investing 101
These factors coupled with the dearth of investment avenues
providing big yields have made a hunt for income the focus for many
investors. This fact makes the investment case for gold extremely
unattractive, as the yellow metal does not provide investors any
current income payout.
Thankfully for income investors, the Credit Suisse Gold
Shares Covered Call ETN (GLDI) was
recently launched this year which goes beyond convention and
focuses on providing current income to investors with a subsequent
exposure to gold. It basically does a Covered Call strategy on the
shares of the SPDR Gold ETF (GLD) while
maintaining a notional long position in the underlying ETF.
The strategy enables the fund to earn a premium on the
underlying long exposure, which is distributed to holders of the
ETN in the form of dividends on a monthly basis. We had earlier
written an article on GLDI (see Gold ETFs Meet Covered Calls in Brand New GLDI
) which explains in detail the investment strategy employed by the
Comparative Performance and Suitability
With just a tad more than a couple of months since inception, it
is too early to say anything definitive about the product's
performance. Still, given its investment strategy and performance
till date, there are certain things that investors must know before
they are swayed by the one-of-a-kind scenario of a lucrative income
opportunity along with gold exposure wrapped in a single
The following chart shows the comparative performance of GLDI
versus GLD since the inception of the covered call ETN back in late
As we can see the products are highly correlated. In fact,
GLDI has a 97.14% correlation with its counterpart GLD. This is not
entirely surprising considering that GLDI is itself derived from
GLD. However, what is most striking is the fact that most of the
time GLDI is ahead of GLD in terms of total returns. Naturally, the
difference lies in the yields offered between the two (see Gold Mining ETF Slump Continues ).
It is true that the yellow metal has been losing its shine in
the past few months. This explains why the cumulative total returns
for both these products are in the red. However, the following
chart will explain another very important attribute of this product
which investors should know before taking exposure to this
The chart above shows the difference between the daily
cumulative returns of the two products (i.e. GLDI returns
less GLD returns). The time frame in
consideration begins at the inception of GLDI.
The chart also testifies our point from the earlier paragraph
about GLDI being ahead of GLD most of the time as indicated by the
curve which remains higher than 0% most of the time.
Also, if we compare chart 1 and 2, we find that the returns
differential and the price of gold have an inverse relationship.
This means that the return differential increases when the
cumulative returns fall (in other words the price of gold
Strategy in Focus
Actually, the covered call strategy involves a short term
bearish outlook on the underlying asset which is probably used as a
protection against a dip in prices. And at the same time, enjoy a
yield on the investment received by writing (selling) slightly out
of the money call options.
Furthermore, the upside for this strategy is significantly
capped in case the underlying asset soars in value. This happens
when the underlying asset increases more than the strike price of
the call option in play (see Is the Tech ETF Signaling Trouble Ahead? ).
In such an event, the buyer of the call option would exercise
his right to buy from the seller at that price that was originally
agreed upon (i.e. the strike price). So, even if the underlying
asset soars in value, the seller of the call option (in this case
GLDI) would only receive the amount which was originally agreed
Therefore we see that investing in GLDI instead of GLD involves
a short term bearish outlook on gold. Investors having a bullish
outlook on gold are much better off playing GLD as opposed to
Other Attributes in Focus
Investors should also be aware that the structure of GLDI is
that of an exchange traded note (ETN). Therefore it would be
subject to credit risk of the underlying issuer. However, the
structure also means that the note will not be subject to tracking
error, an important consideration.
Additionally, the exposure for GLDI doesn't come cheap as the
expense ratio of 65 basis points will no doubt dent investor
pockets. Especially when compared to its other low cost peers.
However, considering its current market price of $19.12 at the
time of writing coupled with its distribution thus far, we get an
average annual yield of 5.87% for GLDI. This is a pretty impressive
yield indeed (see Is CVY The Best Income ETF? ). But don't be
swayed away by just the yield factor alone- instead, give more
thought to the near term outlook for the yellow metal when deciding
between the two for a short-term trade.
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