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A Gold Bug’s Dividend Dream

12/16/2008 1:00 pm EST

Focus: FUNDS

Bryan Perry

Editor, Cash Machine, Premium Income, Quick Income Trader, Instant Income Trader

Bryan Perry, editor of The 25% Cash Machine, likes a closed-end fund tied to the price of gold that also pays fat dividends.

There are several potential catalysts that can propel the price of gold to leap higher. A breakdown in global currencies, hoarding by foreign and domestic central banks of the hard commodity itself, terrorist attacks, hyperinflation, a collapse in bond prices, or a rebound in demand for gold jewelry as the global economy recovers—any one of these or a combination of a few of them will excite the goldbugs and the bloggers that are wildly bullish on gold’s prospects.

With that scenario as a backdrop, gold has a good chance of not just trading back up to $1,000 troy ounce, but maybe even surpassing that level in a big way.

The Gabelli Global Gold, Natural Resources & Income Trust (Amex: GGN) is a nondiversified closed-end management investment company with $248 million in total assets whose primary investment objective is to provide a high level of current income.

To do this, GGN earns income primarily through a strategy of writing (selling) covered call options on equity securities in its portfolio. And in the current market where there are high levels of volatility, selling covered calls is even more lucrative because call premiums are priced so much higher than in a stable market.

Primarily, the equity securities in the fund are gold and natural resources companies. In fact, GGN invests 80% of its assets in these industries. GGN invests in many different facets because it gives the fund’s managers the liberty and flexibility to overweight in certain subsectors of the commodity markets as they see fit. Petrobras (NYSE: PBR), the giant Brazilian oil company, is its top holding followed by a long list of gold mining companies.

On November 20th, GGN announced its continuing distribution policy for the next three months, removing any doubt about the fund’s ability to maintain its dividend policy when every security paying an outsized dividend is under intense scrutiny. The fund will continue to pay a monthly dividend of 14 cents per share.

This is about as good visibility as one can ask for and shows the level of confidence that GGN’s management has in declaring a dividend payout that translates into a whopping 17.32% yield.

And that’s why I’m recommending that you buy the Gabelli Global Gold, Natural Resources & Income Trust while the shares are trading under $12. (It closed above $13 Monday—Editor.) Lock in that juicy 17%+ yield and know that you have in place a solid inflation hedge that pays like a champ.

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