Introduction
Gold has always been a symbol of royalty and opulance. You see how women of countries like India and Dubai love donning them.
Wedding jewelry or antique jewelry has always been the dream of every would-be bride who would like to present herself as the queen in front of her Charming Prince.
However, financial experts have always been intrigued by the very fact that the prices of gold keep rising every day in the market place.
Do you want to underlie gold bars to your structured notes? Well, these are gold-linked notes for you to add to your investment portfolio.
On this parlance, let us unveil the Features, Benefits And Risks Of Gold Linked Notes. Helping you get started further on the same:
What are Gold Linked Notes- Meaning and Conceptualization Explained
Gold Linked Notes are Structured Notes that underlie gold or index assets that are related to gold.
Gold Linked Notes Comprise of your Principal wallet plus the investment you have made on buying couple of ounces in pure 24 Carat Gold.
The Gold ounces is digitally added to your principal wallet once you are done making your initial deposit or so. The initial strike prices are set at the start of your investment tenor.
And, the product issuing firms set final barrier limits or knock in prices after which the gold investment kick-starts or gets activated inside your investment portfolio.
If the initial purchase points or strike levels equal or surpass the knock in levels that have been set, then you get your principal wallet plus interest earnings.
On the contrary, if the initial strike prices does not reach final sale points or knock-in barriers, then you would get the investment portfolio converted into gold. And, the prices are determined at the prevailing market rates of gold.
This is how gold linked notes work for the investor as such.
Features of Gold Linked Notes
These are the important features that are connected with Gold Linked Notes.
Let us have a run-down of pointers that are connected with the same.
Helping you get started on a further note here:
A Know-how on underlying asset allocation
In a gold-linked note, you have the structured note that is linked to the price of gold or to a related index such as gold futures or through a basket of gold related assets. The performance of a gold linked note is usually tied to the price of gold.
Principal protection
On the contrary, the GLNs do not repay capital in case the price of gold falls below barrier levels. The investor gets his principal wallet converted into digital form of gold at prevailing market rates of gold.
Therefore, GLNs provide complete or partial principal protection for investors as such.
Lower tenor periods
GLNs come to you via short-term tenor periods of 6 months to 12 months. The product issuers wait for gold prices to touch their specific barrier levels and immediately once the notes reach specific prices of gold, your notes stand redeemed and you get your capital earnings plus interest as stipulated for you on the notes.
Maturity Date
Like most structured products, GLNs also come to you with specific maturity dates. The investors get their cash wallet back or get their ounces of gold based on prevailing market rates.
No physical ownership of gold
GLNs do not allow you to hold gold in their physical form like gold bars or coins. The value of gold is credited to your account digitally and once the specific exposure to prices get fulfilled investors get their capital wallet back or get the gold value credited back into their digital accounts unless the knock in levels kickstart back again.
What are the primary benefits of GLNs?
These are the prime benefits investors have when they make an investment with GLNs.
Helping you through with a run-down on pointers that are connected with the same:
Get a better exposure to the gold market
Investors of GLNs get better insights into the price movements of gold market and they get this exposure without even owning physical quantities of gold like gold bars or gold coins.
Here, you analyze gold markets to further get insights into how the price movements fluctuate for gold. GLNs also allow investors to hedge GLNs against rising inflation, economic uncertainty or even currency devaluation.
Potential for enhanced returns on cap investment
Therefore, you can get upscale returns if gold appreciates during the term or tenor you hold GLNs. The returns are added to investment based coupons or increased interest earnings.
Therefore, investors of GLNs have a potential to better rates of investment over traditional investing options like bonds or fixed deposits.
Diversification
GLNs provide better exposure to an asset class like gold that behaves differently from traditional bonds or equities. Therefore investors can leverage on a diversified investment portfolio when they hold GLNs.
GLNs retain stable prices even during economic distress or global recession movements making this investment option a more stable and a diversified portfolio as compared to investing via bonds or fixed-income securities.
Enjoy a better level of liquidity
GLNs enjoy a better level of liquidity as compared to your regular structured products like ELNs (Equity-linked notes) or PPNs (Principal-protected notes).
You can get your capital wallet back or get a corresponding value of digital gold that gets credited into your GLN account. You can sell them inside secondary markets to unveil cash settlements as gold prices hike.
This way, you can get your principal wallet back even before the expiry of your GLNs.
What are the risk factors of GLNs?
These are the risk factors that are associated with GLNs. Let us a run-down of pointers that are associated with the same:
Issuer Credit Risk
If the product issuing firm issues a delinquency statement or signs up for bankruptcy, then the investor is at a risk of getting his capital investment back. This is irrespective of how the gold that is tied to the notes performs at the market place.
Liquidity risk
If the prices of gold do not touch knock in levels, then you may not be able to convert your GLNs into liquid cash.
When you then plan to sell the GLNs inside secondary markets, there is no guarantee that you would receive your capital investment back. This is because the prices of gold keep fluctuating inside the markets.
Market risks
Gold prices can thoroughly be impacted by a series of market risks that include the following scenarios:
- Interest rate fluctuations
- Geo political tensions between countries or economies
- Changing inflation rates
- Economic recession scenarios, etc
Therefore, if the investor buys gold at a time when prices are high, the investor faces severe losses when the prices of gold decline subsequently.
And this can have a severe impact on his capital wallet too.
Ceiling limits or cap limits that get placed on GLNs
GLNs are dynamic investment products that do not offer you with fixed rates of returns. You can receive an upside potential to higher investor participation if the prices are doing well and not otherwise.
On the contrary, the product issuing firms also place ceiling limits or caps on the upper returns the investor earns on his GLNs.
Therefore, variable returns on investment is a risk an investor must take under his pedestal indeed.
The Bottom Line
While these notes could offer investors with an enhanced degree to earning returns on investment and help them with portfolio diversification, you also have issuer default risks or liquidity concerns on GLNs that can pose severe risk to the investor’s capital wallet.
You must therefore read the offer documents carefully before investing.
What are your thoughts on this? Do mention it on the comments below!
Frequently Asked Questions or FAQs
Does the yield of GLNs depend on the market prices of gold?
Answer: Yes, the yield of GLNs depend on the price movements of gold. The gold stocks in its digital form and not in a physical form for investors.
How do taxes apply for the income you gain from GLNs?
Answer: The income payouts and the captial wallet you receive from GLNs are primarily treated as Capaital gains income and can be taxed accordingly. However, tax slabs can also be treated as regular income when you receive periodic coupon payments from GLNs.
You may prefer to get in touch with a tax advisor to get an accurate idea on how tax slabs carry out for GLNs. This is done for the safety of investors who would want to preserve their capital wallet with respect to GLNs.
