Geopolitics remains a significant factor in the stock markets in the third quarter of 2023. While the war in Ukraine continues to rage without let-up, the situation in the Middle East recently came to a head dramatically when the radical Islamists of Hamas attacked Israel on 7 October. Since then a military conflict has caught fire both in the Gaza Strip and on Israel's border with Lebanon, with many victims on both sides. Amid the huge international alarm, it was not long before the capital markets, too, reacted. Not only did the price of oil turn sharply upwards, but gold also became more expensive in the first half of October. The troy ounce put on just under 6% on the low of USD 1,809.50 posted as recently as 6 October, once again demonstrating the status of the most important precious metal as a safe haven.
Regardless of the general geopolitical climate, there is another reason to take a look at gold: the cycle of interest rate hikes in the USA could gradually be drawing to a close. The central bank did of course hit the pause button in September, leaving the base rate unchanged at a range of 5.25% to 5.50%. After Fed chairman Jerome Powell adopted a rather hawkish tone, USD yields continued their upward trend. At the beginning of the month the 10-year Treasury was returning more than 4.80% for the first time since 2007. Leading FED representatives regarded this jump as an indication that there might not be any need for further interest rate rises given that financing conditions had tightened recently without any involvement from the central bank. Such a prospect would be good news for the precious metal, which does not give any income itself. For investors who reckon prices will continue to rise but would like to minimise the risk even so, Leonteq has an interesting solution ready: a recently launched capital protection certificate with participation on gold. Repayment of the nominal at the end of the three-year term is 100% guaranteed, while the structure would at the same time participate to a certain extent in any rise in the price of gold.
Investors can optionally take a position in CHF or USD. Both variants come with full capital protection, a strike price reflective of the initial level and a participation level of 100%. The differences arise in the knock-out barrier and the possible rebate that is paid. As soon as the underlying reaches or exceeds the barrier, the participation mechanism switches off. In this case the product pays the knock-out rebate as a sort of “compensation” for the lost returns. The barrier for the CHF-denominated product is 115% of the initial level, while the rebate is 6% of the denomination. Much more attractive terms are available for the USD version, where the participation only ends when gold moves up by 30% or more. In this case a generous payment of 30% of the nominal is due. Since the repayment profile of the capital protection certificate resembles a shark’s fin, the product is also known as a shark note.
Shares of mining companies are regarded as a popular, albeit much riskier alternative to exposure to the gold market. The Leonteq Junior Gold Miners Quality & Momentum Index contains 20 comparatively small and mid-sized representatives of the sector. Launched a good three years ago, the benchmark is founded on a systematic stockpicking process: in July every year experts select the 20 junior gold miner shares based on momentum and quality criteria. The candidates must first make it through a quantitative preselection. The index universe only comprises companies which are listed on the stock markets in Toronto, Australia, New York or Hong Kong, and the average daily turnover over the last six months must be not less than USDmn 5. When it comes to quality, the ratio of debt to market capitalisation, or enterprise value, gross profit growth and the trailing profit margin are scrutinised. The prevailing momentum criterion is the price trend over one, two and three years. The first 20 stocks from the subsequent ranking are included in the index.
An open-end tracker (ISIN CH0542381006, SIX-Symbol JXAUTQ) offers investors simple and low-cost access to the Leonteq Junior Gold Miners Quality & Momentum NTR Index. Other advantages of the certificate are its broad diversification and the fact that the index composition is reviewed regularly, as well as high transparency, plenty of liquidity and low costs. The management fee for the CHF-issued tracker is 0.60% p.a. As already mentioned, this investment – in contrast to the capital protection certificate – entails certain risks. Alongside a weakening gold price, operational problems such as rising extraction costs or setbacks in exploration could put the brakes on the sector.
We look forward to answering all of your questions about our products and how they are traded. Please don't hesitate to get in touch! Phone: 058 800 11 11, email info@leonteq.com or contact us here.