BMO’s $1.28 million autocalls on Junior Gold Miners designed for income, bullish bet

By Emma Trincal

New York, March 21 – Bank of Montreal’s $1.28 million autocallable barrier notes with a contingent coupon due March 17, 2026 linked to the VanEck Junior Gold Miners ETF offer a double-digit return for investors with a bullish outlook on gold who are also seeking income. But the volatility of the underlying asset class – gold mining stocks – is a deterrent for some advisers.

The notes will pay a monthly coupon equal to 13.6% per year if the ETF closes at or above its coupon barrier level, 65% of its initial level, on the relevant observation date, according to a 424B2 filing with the Securities and Exchange Commission.

The securities will be automatically redeemed at par plus the contingent coupon if the ETF closes at or above its initial level on any monthly observation date after six months.

If the notes are not called and the ETF finishes at or above 65% of its initial level, the payout will be par plus the final coupon. Otherwise, investors will lose 1% for each 1% decline of the ETF from its initial level.

Creditworthiness, fee

Steven Foldes, wealth manager and founder at Evensky & Katz / Foldes Financial Wealth Management, said he would not consider the notes.

“There are a few positive things in this offering, but we don’t typically invest in gold or gold miners,” he said.

The first benefit was the creditworthiness of the issuer, which is rated A+ by S&P Global Ratings.

“If you compare this bank’s credit with the other U.S. banks, it’s very favorable, particularly when some other large U.S. banks are rated A-,” he said.

S&P assigned an A+ rating to Goldman Sachs & Co. but JPMorgan and Morgan Stanley are rated A-.

Foldes, who carefully looks at the cost involved with the purchase of structured notes, was satisfied with the 1.6% fee, as disclosed in the filing.

“It doesn’t seem to be outrageous especially on a three-year,” he said.

Finally, the entry price was encouraging. The ETF priced at $35.49 on the trade date, or 31.8% off its one-year high of April.

Inflation hedge

But this adviser brought up several objections.

First, gold is often sold as a hedge against inflation, a conventional view he disagreed with.

“I don’t think recent price moves indicate that it’s a good hedge against inflation. Inflation has been skyrocketing for more than a year and the price of gold miners, in this fund, has declined by almost a third since last spring,” he said.

The ETF dropped 14.4% for the entire year 2022. In 2021, it fell by 21.37%.

Meanwhile, the VanEck Junior Gold Miners ETF rose 30% in 2020 during the pandemic-induced bear market and recession.

No recession in sight

The big decline in 2020 could confirm another commonly held view, which is the benefit of gold as a hedge against deflation, he noted.

“It may be. But even if it’s true, it doesn’t make the note any more attractive to me for the simple reason that I’m not convinced we’re heading toward a recession, let alone a depression,” he said.

“The employment numbers are pretty robust. This recent bank turmoil to me is not a bank crisis. I’m pleasantly surprised at this administration’s very prompt and effective response to restore confidence.

“Both SVB and Signature Bank had problems of their own, one with poor risk management and the other with excessive exposure to crypto. But those were idiosyncratic issues. Even European regulators have reacted swiftly with the forced sale of Credit Suisse to UBS.”

“So, I don’t see the signs of an impending recession. In fact, I believe we already had a recession last year. With two consecutive quarters of negative growth, we met the academic definition of a recession.”

High volatility

Foldes also lacked any strong conviction on the precious metal, being mainly cautious about rather than bullish on the high volatility of the asset class. The VanEck Junior Gold Miners ETF tracks the MVIS Global Junior Gold Miners index, which replicates the performance of small-capitalization companies that are involved in gold or silver mining. Its volatility is 42.65%. The more commonly used VanEck Gold Miners ETF consisting of larger-cap stocks is also volatile albeit slightly less so with a volatility of 37.53%.

“That’s another problem I have with these gold miners. They can move around a lot. Their performance is driven by supply and demand, which are somewhat unpredictable,” he said.

“On its face, 13.6% seems to be attractive. But I would stay away given the underlying volatility.”

Risk mitigation

A financial adviser, who said he has added gold miners to his portfolio, said the notes could be used in tandem with a long position as a way to reduce some of the downside risk.

“It priced at a level fairly similar to the current price,” he said.

The ETF closed at $35.92 on Tuesday.

“The barrier is at $23. Could it go down below that? It could, although it hasn’t happened since March 2020. Even last year when it was at $25, it didn’t breach that barrier level,” he said.

“I think it’s more likely that the note is going to be called within six months or even more likely a year from now,” he said.

“Of course, if you’re bullish, if you think it can go above the coupon, you can always combine this note with a long position and use the barrier for some extra protection.”

BMO Capital Markets Corp. is the agent.

The notes settled on Friday.

The Cusip number is 06374VP34.

The fee is 1.6%.

© 2015 Prospect News.
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