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Published: October 17, 2009
Income investors are exposed.
The U.S. government has racked up $10 trillion in debt and
Washington continues to spend more money we don't have. No one's
talking about balancing the budget: The Obama Administration
estimates budget deficits will soar to $1.8 trillion this year
and $1.3 trillion in 2010.
Many think the value of the dollar will undergo an epic plunge.
That may have begun: The dollar has fallen about -15% versus
other major currencies since March. And Washington has printed
just kept printing more money. So far the federal government has
lent, spent or contributed trillions of greenbacks in stimulus
and bailouts.
As the economy recovers, more private dollars will combine with
the federal dollars and the flood of money, along with falling
dollar values, will likely to cause inflation. The Federal
Reserve, to combat rising prices, likely will be forced to
increase interest rates in response.
So, what's the problem?
The economy is still in the tank. My fixed-rate investments are
doing great. Buying bonds and preferred stock was the best thing
I ever did.
The problem is that fixed-rate investments love recession but
hate inflation. Inflation and rising interest rates cause the
value of bonds and other fixed-rate investments to plummet along
with the purchasing power of the dollar.
Now, one can hope this scenario won't unfold. But it's only
prudent to prepare for the possibility. I found an investment
that can help protect your portfolio from inflation and pay you
10% at the same time.
The Gabelli Global Gold,
Natural Resources and Income Trust
(NYSE: GGN) is a closed-end fund
that pays a high monthly
distribution. It invests at least
80% of its assets in stock in
companies in the gold and natural
resources industries.
As of June 30, the fund held most
assets in metals and mining (54.8%)
and energy and energy services
(35.9%). Top holdings included gold
mining giant Newmont Mining
(NYSE: NEM), massive copper
producer Freeport-McMoRan (NYSE:
FCX) and Brazilian oil and gas
producer Petroleo Brasileiro
(NYSE: PBR).
What's so great about gold, metals
and oil?
They're commodities. Commodities --
real things -- are a hard asset.
They tend to appreciate in times of
inflation as investors put their
money in assets that have intrinsic
value.
The businesses that produce such
commodities tend to thrive. For
instance, when the Consumer Price
Index rose from 3% in May 1972 to
11% in December 1974, the S&P
Goldman Sachs Commodity Index rose
+222%, averaging +55% annually.
Bonds -- a fixed-income investment
-- only averaged a +5% gain.
During the high inflation/high
interest-rate period of 1972-1981,
commodities returned an average
+19.2% a year while bonds averaged
just +3.3%. After taxes and
inflation, the bond return was
actually negative.
In addition, supply and demand
factors bode well for commodities as
we go forward. The world continues
to consume 80 million barrels of oil
a day. The emergence of China and
other developing markets will make
demand for industrial raw materials
soar to levels never seen before.
While there are many ways to invest
in commodities and other commodity
funds, the great thing about the
Gabelli Gold, Natural Resources and
Income fund is the revenue stream.
The fund has consistently paid $0.14
every month since its inception in
March 2005. That equates to an
eye-popping 10.3% yield.
The fund pays dividends from writing
covered calls. Writing calls
involves selling someone the right
to buy your security at a certain
price; if the security doesn't reach
that price, the seller of the option
gets to keep the money he was paid
for the option. It's a good way to
generate income, and the only
downside is selling a rising stock
that might rise more.
The fund's annualized total return
since inception is +4.1%. The S&P
500 is negative for the same period.
GGN, however, has returned more than
+37% year-to-date.
There is a strong chance that
inflation rears its ugly head in the
not-too-distant future. It could be
next week or it could be several
years. GGN offers investors income
in the meantime. Make sure you have
something in your portfolio that
will perform well in inflationary
times. -- Tom Hutchinson
Staff Writer
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