Barclays’ $3.02 million buffered SuperTrack tied to gold, silver ETFs offer diversification

By Emma Trincal

New York, Nov. 12 – Barclays Bank plc’s $3.02 million of 0% buffered SuperTrack notes due Nov. 4, 2022 linked to the SPDR Gold trust and the iShares silver trust provide a welcome diversification from equities, advisers said. The notes offer attractive gain potential but more buffered protection would have been desirable, they noted.

If each ETF finishes at or above its initial level, the payout at maturity will be par plus 1.8 times the gain of the worse performing ETF, according to a 424B2 filing with the Securities and Exchange Commission.

If either ETF falls by up to 10%, the payout at maturity will be par.

Otherwise, investors will lose 1% for each 1% decline of the worse performing ETF beyond the buffer.

Buffer

“It’s nice to have something a little bit different from the S&P,” a market participant said.

“Certainly, the leverage is good and having no cap is good too. I would have preferred to have a more generous buffer, but I understand that pricing it is expensive and you may have been forced to take a cap.

“10% is not much. But it’s a hard buffer, so it looks pretty reasonable.”

What made this adviser tolerate the size of this buffer were the current prices of the ETFs, which, he noted, have declined recently.

“GLD and SLV are now at their three-month lows. They’re still high but if you look at the big picture, they’re much lower than they were in 2011,” he said.

Room for upside

The SPDR Gold trust and the iShares silver trust are bullion funds. Listed on the NYSE Arca under the ticker “GLD” and “SLV,” respectively, they are trusts that hold the precious metals.

SLV is trading at $15.72 a share, or 67.5% lower than its April 2011 high.

GLD topped out in September 2011 at $185.85 a share. It closed on Tuesday at $137.43, a 26% discount from that eight-year-old peak.

“There’s a lot of upside potential for both funds,” he said.

Correlation

The Silver Trust, if he had to guess, would likely be the worst performer since the ETF is more volatile than its gold counterpart.

“When gold is up 20%, silver may rise 30% or 40%. And it’s the same thing on the downside. Its price will show bigger moves. It’s a more speculative play than gold, which tends to be used as an alternative to currencies.”

Another redeeming factor lessening some of the risk associated with the notes is the correlation between the two underlying funds, he noted.

“They’re definitely positively correlated to each other. Using those two in a note is a little bit like putting the Russell 2000 and the S&P 500 together in an equity worst-of. Here you have two precious metals, which tend to move together,” he said.

Fresh rally

Tom Balcom, founder of 1650 Wealth Management, expressed a more cautious view.

“10% on two commodities funds is very small even for a hard buffer. I’d rather have a larger buffer even if it means having a cap on the upside,” he said.

“If you want protection, 10% isn’t much at all.”

While the gold fund is still trading below its multi-year high, its price over the shorter term has increased significantly, he said. The share price has jumped 22.5% from early May until its 52-week high in September.

“Gold had a pullback recently but it had a nice runup since May. It may be a little bit too high right now,” he said.

The fund is down 4.7% this month.

One sign that an asset may be overvalued is how marketers find their way to his desk, he explained.

“We’re receiving tons of e-mails for those gold mutual funds or ETFs. Usually, we get these marketing e-mails when something is near its peak. In 1999, it was technology stocks,” he said.

No inflation

Clients typically don’t seek exposure to precious metals.

“No client ever calls us for gold. They defer it to us. And I wouldn’t recommend market-linked notes tied to gold right now,” he said.

“People buy gold as a hedge against inflation. With interest rates so low, people assume we’ll have inflation. But we haven’t had inflation. A company like Amazon is keeping a lid on inflation. Technology in general reduces the chances of inflation. I don’t think inflation is going to be an issue anytime soon.”

Balcom explained the gold rally of the past six months as a “defensive play” from investors worried about a stock market correction.

Now that the market is hitting new highs and investors’ sentiment is turning more bullish, precious metals may not hold so well.

“With rates as low as they are, people really want yield, and gold doesn’t provide any income stream. It’s bought as a hedge against inflation or by people who predict a doomsday scenario.

“We don’ have exposure to gold.”

Barclays is the agent.

The notes (Cusip: 06747NMB7) priced on Nov. 1 and settled on Nov. 6.

The fee is 0.7%.

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