Barclays’ notes on SPDR Gold Shares offer safer, timely way to bet on gold rally

By Emma Trincal

New York, March 17 – Barclays Bank plc’s 0% notes due March 22, 2028 linked to the SPDR Gold Shares provide capped participation with downside protection to investors seeking to make a bullish yet defensive bet on the precious metal, a portfolio manager said.

The payout at maturity will be par plus any gain in the ETF, up to 66.4%, according to a 424B2 filing with the Securities and Exchange Commission.

Otherwise, investors will receive par.

The SPDR Gold Shares ETF tracks the price of gold bullion.

A collar

“It’s a reasonable tradeoff. You're not exposed to the downside and the payout is fairly simple,” said Steven Jon Kaplan, founder and portfolio manager of True Contrarian Investments.

He described the trade as similar to a collar, a protective option strategy, which is embedded in most structured products. It consists of protecting the downside against some of the losses while capping the upside. The trade involves the simultaneous sale of a put while purchasing a covered call.

“Writing the covered call gives you some of the money necessary to buy the put. Collars are a good way to make money while protecting your principal,” he said.

The issuer caps the notes by selling an out-of-the-money call limiting the participation to the strike price, set above the initial price. The short call is covered, which provides the one-to-one participation up to the cap.

Since investors benefit from a full protection on the downside, the short put position is at-the-money, where the initial price and the strike price coincide, leaving no gap for losses, he explained.

With a 66.4% cap, noteholders may expect up to 10.72% a year on a compounded basis.

“Some investors are driven by the fear of missing out. For those, obviously the cap may be a problem,” he said.

“Chances are that in five years, if gold goes up by a huge percentage, the buyers of this note will be capped but the advantage is that at least they have this security on the downside,” he said.

Valuation

A bullish argument could easily be made for gold over the next five years, he said.

“Gold has been extremely undervalued at the beginning of this century unlike the Nasdaq, whose valuation was unreasonably stretched,” he said.

“The price of gold has been catching up recently. Even though it might seem near all-time highs, it's not that high adjusted for inflation,” he said.

Spot gold was trading at $1,973 per ounce on Friday.

“Today, gold prices have doubled from their levels of 1980. But it’s still an undervalued asset because during those decades, inflation has obviously more than doubled. All you have to do is look at the prices of real estate, food, gasoline, or cars. My guess is that inflation has probably quadrupled while gold has only doubled. It hasn’t caught up with inflation.”

Repeated cycles

Aside from a sound valuation, Kaplan pointed to the growth potential of gold through the study of past market cycles.

“We’ve seen a consistent pattern in the past. Each time equity valuations were stretched leading to a crash, gold prices tended to rally,” he said.

“We just had the longest-ever U.S. equity bull market from March 2009 through January 2022. We’re probably headed for a long bear market,” he said.

The market peak can be traced slightly earlier, in November 2021 for the Nasdaq.

Just as in the past, the current bear market is due to the overvaluation of growth stocks.

“Today it’s tech. But when the market crashed in January 1973, the darlings were the Nifty-Fifty. During the roaring 20’s you had other sectors fueling speculation,” he said. Some of those sectors included automobiles, railroads or telephone companies.

Two other bear market examples included the 2000-02 internet bubble and the 2007-09 financial crisis.

“Each time, those equity bubbles didn’t need a particular trigger to burst. The cause was the dangerously high valuations of some popular stocks like the dot.com in 2000 for instance,” he said.

Peak plus eight months

The timing of the notes was relatively favorable.

“There’s an interesting overlap between the beginning of an equity bear market and the start of a gold rally,” he said.

He said he observed a lag of about eight months between the peak of an equity market and the time at which gold prices would bottom and begin to rise. He offered some examples.

The 1929 crash, which occurred in September, was followed by an uptrend in gold starting in May of the following year.

In 1973, stock prices peaked in January; gold began its ascent in September.

The Nasdaq peaked in March 2000 and gold bottomed in November of the same year.

In a similar way, the current bear market, which began in January 2022 when the S&P 500 hit an all-time top, paved the way for a gold bull market. Kaplan said it probably began in September.

So far, the gold rally has been “surprisingly modest” although gold has soared recently, he said.

It could just be because the bear market in stocks, which is when gold tends to shine, is far from over.

“We may not see the bottom of the bear market until the spring of 2025. It’s just my guess,” he said.

Durable uptrends

Of equal interest to holders of a five-year note tied to the precious metal: gold rallies tend to last a long time, he said.

“The gold bull market of 1973 went on until January 1980. You had a pause in 1975-76. There are always some pullbacks. But the trend was long-lasting,” he said.

Similarly, the gold bull cycle which kicked off in November 2000 did not end until April 2011, he noted.

Going further back in time, gold prices were strong during the Great Depression, posting a long-lasting bull market between May 1930 and March 1937.

To be long or not

Potential note buyers may be concerned about capping their return if gold is about to begin a steep and enduring uptrend.

Kaplan said investors’ decisions should rely on their conviction and risk tolerance.

If the view is strongly bullish, the notes are not going to be a good fit, he said.

“It’s possible that you may underperform the precious metal. That’s the chance you take. If you see gold rising 200% in five years, don’t invest in a note that caps your upside at 66%,” he said.

“If you want to be long, you can always be long. There are plenty of ways to play the long side, including buying the gold miners, which are more volatile than the precious metal itself.”

He was referring to the VanEck Gold Miners ETF and to its small-cap version, the VanEck Junior Gold Miners ETF, for added volatility.

Kaplan disclosed that he is long the Junior Gold ETF.

“But if you are a more conservative investor trying to protect your principal, this note is interesting. It gives you a reasonable risk-adjusted return. You could make nearly 11% a year with no market risk exposure. It’s a decent tradeoff,” he said.

Barclays is the agent.

The notes will settle on Wednesday.

The Cusip number 06749NXA5.

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