Things are moving in the treasuries of the providers of physical collateralised gold ETFs. Investors have been mostly cashing in for months, with the precious metal inventories of this investment vehicle accordingly tending to decline. This all changed in May, though. According to figures from the World Gold Council (WGC), global gold ETFs posted inflows in the first three weeks of the merry month (see graph). If demand does not collapse after Whitsun, the balance of inflows and outflows in May should be positive for the first time since January. The price trend supports this scenario: on 26 May a fine ounce of gold cost more than USD 1,900 for the first time since the turn of the year. The exemplary rebound for the most important precious metal – the price reversing the downward trend that began in August 2020 – is also bringing players on the options market into the action, with traders reporting lively turnover. Contracts with a strike of USD 2,525 per fine ounce maturing in May 2022 experienced particularly high demand, indicating that some traders are confident that the precious metal will climb to more than USD 2,500 over the year ahead. These deals came with a rise in the implicit 1-year volatility.
Leonteq is utilising the current situation on the options markets for a special new issue: the Zurich financial boutique is launching a Shark Note on gold. This product allows investors who anticipate further price rises but do not rule out significant reversals to take a position in the precious metal. The Shark Note offers capital protection at the end of the 5-year term. Specifically, the issuer is giving a guarantee of 95% of the denomination. At the same time, the product participates in a rising gold price. There is a limitation here, however: on the initial fixing a barrier of 150% of the gold price at the time is set. As soon as the underlying reaches or exceeds it during the term, the participation function switches off. However, even then holders of the product do not leave empty-handed. Instead, they receive the rebate coupon of 15% in addition to the capital protection level of 95% on the repayment date.
A glance at the repayment diagram (see graph) makes it clear where the Shark Note gets its name from: the progression resembles the fin of a shark. The capital guarantee means that the product's loss risk is limited to 5%. As soon as the price of gold goes beyond the initial fixing at the end of the term, the participation kicks in. The picture changes if a barrier event occurs, in other words the underlying climbs to 150% of the initial fixing. The investment would then end with an income of 10%, or an annual return of 2%. Please note that the modalities described and the capital guarantee apply only on the maturity date. During the term a number of factors will have an influence on the price of the Shark Note. In addition to the gold price, these include in particular the volatility of the precious metal and the general level of interest rates.
Following the latest rebound of gold, investors can count on further price rises with the Shark Note. Should the precious metal sink again, the capital protection limits the loss risk considerably. Gold could, for instance, come under pressure if bond yields were to experience a sharp rise or central banks were to actually embark on a course of tightening monetary policy. In return for the high level of security, holders of the Shark Note relinquish the upward participation from a certain level. Indicatively the barrier (150%) is at a gold price of more than USD 2,850. To that extent the yellow metal would have to far exceed the all-time high of USD 2,072.4951 reached in August 2020 for the structured product to be at a disadvantage compared with a direct purchase of the underlying. Even then, though, investors would not go away empty-handed, as they would get the rebate coupon of 15% in addition to the capital protection level.
Rebate Coupon: 15%
Issuer: Leonteq Securities AG (Rating: Fitch BBB-)
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.