Introduction
Gold is an ever-rising commodity. In other words, the gold prices keep shooting up all the time. We can never see its pace coming down. Women love to buy gold jewelry to celebrate auspicious events.
And even in developed economies, you find people going in for gold watches, chains, and lockets. For most ultra-wealthy individuals, owning gold shows their luxury and opulence. This way, gold is preferred across homes, retail, and commercial segments across economies.
On this note, let us move on to dwell on how gold linked notes work while also giving you a touch-down into the basics:
What Are Gold Linked Notes- Meaning And Conceptualization Explained
A gold-linked note or a GLN is a type of equity-linked structured note. This type of note is similarly structured like an equity-linked note, otherwise known as ELN. The underlying asset or a commodity for a GLN will usually be gold instead of other type of stocks.
GLNs are usually preferred by investors who may want to improve their cash holdings under a stable or mildly bullish view of gold. Therefore, investing in GLNs helps investors increase the cash holdings that they hold in their current or savings deposit accounts.
Instead of buying gold outright, it is a better option for you to invest in GLNs as the investment portfolio can garner attractive rates of return for you as an investor.
In case the prices of commodities are rising reflecting a bullish trend, then consumers may prefer buying gold at the prevailing market price. On the contrary, when the market reflects bearish or falling market trends, then investors can apply options to gold such as a ‘put’ option’. This way, investors get a higher price of gold than market rates at the time of maturity.
In a nutshell, investing in GLNs are sophisticated investment products that carry significant risks and you must have the risk tolerance to handle your portfolio and not meant for those of you who cannot handle the product or are risk averse.
The Working Mechanism Of GLNs
Let us figure out how GLNs work for investors. Here are pointers pertaining to the same:
- 1. Agreement Process Between The Gold Banker And The Investor
The investment or the gold banker gets into an initial round of discussion and post then an agreement is created between the product issuer and the investor. The investors agree upon certain ounces of gold they pay as the capital or principal investment. The ounces of gold are bought at a discounted price here.
- 2. What Is The Yield Of The Investment?
GLNs aim to provide ounces of gold at the discounted value of the current prevailing market prices. However, investors redeem this gold at their market prices. The difference between the purchase price and the redemption amount marks the yield of the GLN.
- 3. A Numerical Example Covering The Same
The on-the-spot price or the purchase price of 330 ounces of gold may cost US$ 544,170 while the actual price of the investment amounts to US$ 540, 565.96. The difference between the investment value and the market price, therefore, determines the yield of the GLN. The difference amount of US$ 3,604.04 is the annualized yield for an investor’s GLN. The rate of returns for this investment is arrived at 8% pa.
- 4. Know-How On The Terminologies Used To Connote The Numerical Example As Stated Above
The initial strike price or the investment value at the discounted price is 97%. Here, we take the lower value (US$540,565.96) as the initial strike price. The product issuing firm may want gold prices to either reach the par value of the initial strike price or surpass the value.
Here, the market price goes to US$ 544,170 and this is a clear indication of how the price of gold goes beyond the initial strike price of gold. The investors therefore get a full redemption of their investment as a cash amount at the final market value price of the GLN which is US$ 544,170.
However, when the price of gold falls below the strike rate in this case US$ 540,565.96, the investors get their ounces of gold redeemed into their gold accounts.
They may need to wait until the gold prices hike or surpass their strike rates post which the redemption happens as a cash settlement or a wireless bank transfer and this is the final price at maturity.
- 5. Illustration Of How You Find This Scenario Drafted On Paperwork
Image Courtesy: https://www.dbs.com
- 6. Graphical Representation Of How The Mechanism Works
Image Courtesy: https://www.dbs.com/
7. Scenario-based Summary Of The Represented Info
Image Courtesy: https://www.dbs.com/
What Are The Core Benefits You Have When You Invest In GLNs?
These are the core benefits you have while investing with gold-linked notes. Let us find out what they are:
- 1. Enhanced Rates Of Returns
Investing in gold makes a wise purchasing decision as we have never witnessed gold prices drop except during sharp economic downturns like recession or maybe when a global pandemic scenario is declared by WHO wherein people cannot go out to buy gold. Above all, GLNs offer enhanced rates of return when investors can get on-spot movements of commodities gauged precisely or accurately. Having a constant view of the gold market also helps investors leverage their returns on investment.
- 2. Customized Plans For Investors To Choose
Investors do not have any specific requirements to pick what is offered. They can choose the value of gold assets they want to capitalize as an investment option. The strike rate goes up and you get the redemption as a cash settlement or a wireless bank transfer option. The strike rates go down, you get the value of money invested via gold bars or coins and you can sell them as the gold prices get better. Hence, this is an absolute win-win and a tailor-made investment option for you to choose from and is suitable for dynamic investors.
- 3. Choose Your Own Strike Rates And Tenor Period
You can add another layer of customization while opting to invest in GLNs. You can formulate your own strike rates and tenor period for this portfolio. It means you decide a rate you can handle as your very own level of risk tolerance. This way, a GLN is a 100% customizable product that you can encash in to suit your immediate financial objectives.
- 4. Short-term Investment Options
GLNs are usually short-term investments wherein the tenor ranges between 4 months and one year. You can easily spot rising or falling gold prices at any given point in time and get your portfolio redeemed.
- 5. Portfolio Diversification
By investing in GLNs, investors get widespread exposure to how commodities work in the derivative markets. You also get exposure to how structured products work in the primary as well as secondary markets. Above all, you can opt for a cash settlement procedure or go for redemption of your investment into gold. Therefore, this is a diversified investment portfolio for you to choose from.
What Are The Risk Factors For GLNs?
These are the risk factors you have with respect to GLNs. Helping you get started here:
- 1. Market Risks
Gold belongs to the commodities market and is subject to rising or falling rates in volatile market conditions. Therefore, the pricing movements may not always be favorable for you as an investor as the price movements can get impacted adversely as well or decline too. Investors must have a reasonable level of risk tolerance when they decide to invest via GLNs. In a crux, the commodity market works almost as same as the equity market does.
- 2. Currency-Value Fluctuations
Gold is a commodity that is usually charged in US dollars. Therefore, currency-rate fluctuations can also impact the rate of returns you get from this investment option. You can watch currency exchange tabloids via stock or commodities exchange firms.
- 3. Issuer Risk
Like any other type of structured product, GLNs are also subject to the credit risk of the issuer. If the credit-issuing firm or financial institution does not perform well, then the investor’s capital money can be at stake. As an investor, you must gauge the creditworthiness of the issuing firm before opting for any type of investment plan and comprehend the product well.
4. Policy Change Scenarios
Uneven change or rollover of policies can also allow gold prices to fluctuate unimaginably and this happens when a government signs off and a new govt takes over. Redemption payment or credit risk factors accentuate a new rollover of policies and this can affect the capital investment made by investors across investing plans. You can see if you have anything stated on the disclosure documents that provides a shield to investors if economic downturns or policy changeovers happen.
The Bottom Line
You must understand the complexity of how different investment plans work so that you make the best use of what is offered to you.
Reading websites and familiarizing yourself with how investments work can be a full-fledged move over getting carried away by false claims made by firms just to get hold of your hard-earned money. Investors who do not comprehend risks and are not suitable for handling risks cannot choose dynamic investment plans.
You must also understand risk factors and read the offer documents thoroughly before signing in on the dotted lines.
Frequently Asked Questions- FAQs
1. For whom are GLNs suitable?
Answer: GLNs are structured notes that are issued by financial institutions and tailored to suit investors’ needs. However, this is an investment plan meant for investors who can take a reasonable degree of risk tolerance under their belt and claim ownership over their investment decisions.
2. How can investors gain from this type of investment plan?
Answer: GLNs are notes issued by reputed financial institutions and investors are exposed to credit risks, market risks, or liquidity concerns to name a few. Inflation can also eat away your annualise returns on investment. Therefore, you must glance through screening documents and predetermine what the plan has in store for you. You can improve returns by viewing market movements and getting to understand how things work. Additionally, you must have an overview of what “spot, “strike, or other financing terms mean.
3. Are GLNs exposed to the credit risk of the issuing firm?
Answer: Yes, GLN investor holders are exposed to the credit risk of the issuing firm as it can lead to the depreciation of their investment funds. Credit issuing risk implies the risk of a financial institution signing up for insolvency or bankruptcy.
