Gold is an interesting asset that has properties of a currency and a commodity. It is a safe haven in times of turmoil and is an asset that has a unique place in the market. The price of gold has gone on an interesting path in recent years with two flat years after the stellar year of 2020 when its value jumped by 25% during the market and economic shocks caused by the outbreak of Covid-19. In 2023 it showed further gains with a return of 13% for the year. During 2024 the trend has remained broadly upward. The first part of Q1 2024 was flat but Gold then gained 20% in little over a month setting an all-time high in early April. In the subsequent three months the price has remained stable.
The global landscape
As a powerful economy with a particular eye on commodity prices China now has a significant interest in Gold markets on a scale that did not exist during previous cycles. There is both government intervention and investor demand from China. Chinese investors have continued to use FX rates as hedging or investment vehicles and FX remains one of the most popular in structured deposits. This asset class was led by the gold/US dollar (XAU/USD) pair, which was featured across 313 products in May. It is interesting that Gold is now firmly thought of as a currency as much as simply a commodity. The underlying belongs in both asset classes.
Recent issuance of structured products in commodities according to structuredretailproducts.com shows that Gold is in first place with a total notional of USD 3.01bn across 571 products. WTI Crude Oil is in second place by notional with USD 1.63bn from 1041 products. Third place is Brent Crude Oil with USD 573m from 489 products. Other commodities are significantly behind with only Corn (USD 280m), Soybeans (USD 274m), Natural Gas (USD 271m) and Copper (USD 269m) above USD 250m. Therefore, Gold linked structured products total more than all other commodities combined illustrating its popularity and importance.
Product choices vary across different regions and issuers.
In China, deposit-based products are common with capital protection and either digital return or participation in the performance of Gold. This is consistent with the concept of currency protection and exposure to Gold to provide a hedge against local currency.
In European markets this type of deposit product is also seen, for example the Deutsche Bank Gold Opportunity Note 2027 in Belgium (SRP id 45370607). This three-year, capital protected product is issued on the paper of Goldman Sachs International pays 100% of the performance of the London Bullion Market Association (LBMA) gold price, expressed in euro. The return is capped at 24%. This represents a maximum return of around 7.4% compounded in the event that the Gold price performs to at least the same level. Given that Gold has recently gone through all-time highs it is clearly valuable to include capital protection. Examples also come from Sweden, where UBS has issued a capped product with a maximum return of 150% in USD (SRP id 43628317).
Structured product examples
Other products in Europe adopt the idea of Gold as being in the Commodity Asset Class. For example the 7.25% p.a. Multi Barrier Reverse Convertible on Gold, Silver issued by Leonteq Securities (SRP id 46187235) is an 18 month Reverse Convertible on the worst of Gold and Silver with 10% downside protection and Autocall opportunities.
The product with SRP id 46192549 issued by BNP Paribas 18M Autocallable Reverse Convertible Worst-of on Brent Crude Oil, Gold and WTI Crude Oil in USD has a declining Auto-call schedule with a 9% coupon. This product is therefore linked to the three most popular commodity underlyings, two Oil prices and Gold.
SRP id 45599455 is also issued by Leonteq and is a Twin-Win on Gold with a maturity just over one year. The investor gets 100% participation in both the upside and downside movement up to 10% in either direction. If either barrier is breached during any time in the investment term a rebate of 2.88% is paid, which is also the minimum return in the case of underlying moving less than this amount. This is an interesting idea which guarantees capital and a reasonable one year coupon at a minimum with the opportunity to pick up further returns if the underlying goes up or down a modest amount.
The Twin Win has also been seen in other markets such as Poland. BNP Paribas issued the PLN Quanto Twin Win Certificates - Siła Złota II (SRP id 44651170). On a 2 year term the note will pay up to 22% in either direction but also knocked out at any time of the investment term. In that case the minimum return of 2% is paid. Dual directional payoffs make sense given the expectation that the Gold price will not necessarily keep rising since this product type will provide a return in the event of a medium sized gain or fall in the underlying price.
Gold remains a popular underlying with a variety of product types in different markets and with the importance it has in the world economy and the interest in its price movement there is every expectation that it will remain so.
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