UBS’ $750,000 phoenix autocalls on VanEck Gold reflect macro bets on inflation, equity market

By Emma Trincal

New York, Aug. 8 – The decision to buy into UBS AG, London Branch’s $750,000 issue of trigger phoenix autocallable optimization securities due Aug. 7, 2025 linked to the VanEck Gold Miners ETF depends on investors’ views on key macroeconomic factors such as inflation and stock market direction, advisers said.

If the ETF closes at or above the trigger price – 75% of the initial share price – on a quarterly observation date, the issuer will pay a contingent coupon for that quarter at the rate of 12.73%, according to a 424B2 filing with the Securities and Exchange Commission. Otherwise, no coupon will be paid that quarter.

If the shares close at or above the initial price on a quarterly observation date, the notes will be called at par plus the contingent coupon.

If the notes are not called and the shares finish at or above the trigger price, the payout at maturity will be par plus the contingent coupon. Otherwise, investors will be exposed to the share price decline from the initial price.

No gold exposure

“Gold miners are highly correlated to gold, and we don’t have exposure to the precious metal,” said Tom Balcom, founder of 1650 Wealth Management.

For one thing, Balcom said his exposure to commodities in general was very limited.

“We are not very comfortable with the volatility of the asset class. Also, when you invest in commodities, you have direct exposure to futures, which comes with some unexpected issues like the cost of rolling the contracts.”

While the VanEck Gold Miners ETF is an equity fund of mining companies, the correlation with the underlying commodity was too high for this adviser.

Balcom was not very interested in gold in general.

“We don’t invest in gold. First because it’s a commodity. But mostly because gold doesn’t generate any income. It’s just a storage of value,” he said.

Unnecessary hedge

“That said, the notes generate an attractive source of income. 12.73% is a very juicy coupon. If you believe that gold prices will go up or stay neutral, it’s a good deal,” he said.

But without being overtly bearish, Balcom did not feel comfortable with the underlying.

“Gold is an inflation hedge and inflation has already come down. I believe it will continue to go down globally due to the hawkish actions of central bankers. At some point, the need to hedge inflation will subside. It will put downward pressure on gold and gold miners,” he said.

Recent barrier hit

The initial level of the underlying ETF was $29.28 at pricing, setting the barrier price at $21.96.

“We hit that price at the end of September and I’m afraid we could revisit this barrier level pretty easily. While the price of the ETF pulled back since May, I think you’re taking a lot of risk,” he said.

“I could buy a one-year Treasury with a 5.35% yield. Obviously, it’s not a 12.73% yield but there’s no risk at all.

“The gold miners could move either way and they can move a lot. The chances of breaching the barrier are too high. We hit that level less than a year ago.

In conclusion, Balcom said he would not consider investing in the security.

“I wouldn’t do it. It’s not because I don’t like the note. We just don’t have gold in our portfolio.”

Above the barrier

Steven Jon Kaplan, founder and portfolio manager of True Contrarian Investments had a different opinion arguing that the share price of the ETF was more likely to move up than down.

“The ETF could go back down to its September level, but I don’t think it would stay there,” he said.

The fund’s recent popularity did not make it vulnerable to a sharp or long-lasting downturn, he noted.

“I’m a bit bearish on the short run because a lot of people have been buying gold since last spring. The ETF got a lot of attention. But the level was not nearly as high as in August 2020,” he said.

Kaplan said the coupon rate was relatively attractive.

“There’s certainly a risk of seeing the price getting close to its September low, which happens to match the barrier level. It may even go below that point, but I don’t see it staying there for very long. It should stay above that level. So, I think you’ll end up getting all the coupons or most of them.”

Technical analysis

He brought up two main reasons to justify his view, starting with the analysis of the ETF’s chart over the past 10 years.

“The gold miners are showing a very long-term upward pattern. The ETF has been making higher lows for a long time. The low of 2020 was higher than the low of 2016. Same thing for this year’s low in September, which was higher than the one in 2020.

“If the share price goes below the barrier, it may last a week of two. But at that level, people, especially value investors, will come in and buy.”

Bear hedge

Kaplan brought up another factor, based on a market and macroeconomic historical pattern: gold tends to appreciate when stock prices are falling.

“People buy gold when the market turns bearish. Every time we’ve come out of a bubble collapse, gold prices have skyrocketed. We’ve seen this happen in 1929, in 1972 as well as in 2000. These are times when investors look for alternatives to equities. Gold and Treasuries are top picks in those markets. We’re heading in that direction.”

UBS Financial Services Inc. and UBS Investment Bank are the underwriters.

The notes settled on Monday.

The Cusip number is 90301W569.

The fee is 1.5%.

© 2015 Prospect News.
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