JPMorgan’s contingent interest autocalls on gold ETF offer competitive short-term income

By Emma Trincal

New York, Aug. 17 – JPMorgan Chase Financial Co. LLC’s autocallable contingent interest notes due May 26, 2021 linked to the VanEck Vectors Gold Miners exchange-traded fund offer an attractive yield for investors moderately bullish on the precious metal over the short term, buysiders said.

The notes will pay a contingent monthly coupon at an annual rate of at least 9.9375% if the fund shares close at or above the 70% coupon barrier level on the review date for that month. The exact coupon will be set at pricing, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be called at par plus the contingent coupon if the ETF closes at or above the initial level on any monthly review date other than the final one beginning on Nov. 23.

The payout at maturity will be par plus the final contingent interest payment unless the final share price is less than the 70% trigger level, in which case investors will lose 1% for each 1% decline of the ETF from its initial level.

Tenor

Jerry Verseput, president of Veripax Wealth Management, said the tenor offers some level of safety as he sees the outlook for gold relatively bullish in the near term.

“The shorter term might work to your advantage in this case. With notes in general, I prefer longer-dated notes. But in the long term who knows what gold does. It could be up 30% or down 30%,” he said.

Verseput sees several macroeconomic factors, which should benefit gold prices.

“Over the next nine months, we’re still going to go through the stimulus. Government spending will continue to push down the value of the U.S. dollar. People will still be hedging the dollar with gold,” he said.

Rally

The price of gold has been skyrocketing this year, setting new all-time highs. Earlier this month, it peaked at $2,000 per ounce surpassing its previous high of September 2011.

The VanEck Vectors Gold Miners ETF, an equity fund of gold mining companies, is highly correlated to gold and has jumped more than 45% this year.

This does not mean the meteoric rise went on uninterrupted.

“We had a correction last week in gold. It was the largest daily drop in one year,” he said.

The price of gold fell 7.15% to $1,921 on Aug. 12 from $2,069 on Aug. 6.

“But I believe gold will continue to go up over the next few months because we’re still going to talk about the stimulus and what it does to the dollar. The dollar right now is falling because we’re printing $3 trillion...it could be $5 trillion of new dollars. So obviously the value of the dollar is falling. When the dollar is weak it tends to drive up the price of gold.”

Terms

In this scenario, the 70% barrier was sufficient.

“I really think that the 30% safety margin over nine months is fine,” he said.

The return was also attractive.

“If you’re making 9% or 10% a year in this environment, I think that’s great,” he said.

Early call

A market participant holding a positive view on gold said the notes could provide an attractive option for investors seeking yield albeit for a short duration.

“I think it’s a great yield and the period will be short. I would expect the notes to get called in three months.

That’s still good compared to what you get with most bonds out there,” he said.

He expects gold prices to continue to rally.

“Covid-19 is not going away in three months.

“You have this panic from the pandemic.

“People are not getting paid to hold the dollar anymore, so they’re selling it. The dollar is down.

“People are going to continue to bid on gold in the next three months.

“It’s a store of value, a kind of hedge against the disaster.”

Fixed-income replacement

This market participant was not concerned about the downside risk at maturity since he expects the notes to be called on the first review date in November.

Even over a three-month period, receiving 1.10% per month allows investors to outperform most rates paid in the fixed-income space, he said.

“The three-month T-Bill rate is 9 basis points. Worst case: you’re getting called after three months. You’re making 3.30% in three months. That’s 37 times the three-month T-Bill.

“You’d have to go out far on the curve and down on the credit spectrum to find anything close to this coupon.”

The notes will be guaranteed by JPMorgan Chase & Co.

J.P. Morgan Securities LLC is the agent.

The notes (Cusip: 48132M5X5) will price on Aug. 21 and settle Aug. 26.

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