BofA’s $8.7 million notes on Gold Miners ETF likely to pay off despite bear market

By Emma Trincal

New York, Nov. 17 – BofA Finance LLC’s $8.7 million of 0% market-linked one look notes due Nov. 25, 2024 linked to the VanEck Gold Miners ETF increase the chances of gains despite a bear market underway, said Steven Jon Kaplan, founder and portfolio manager of True Contrarian Investments.

If the ETF finishes flat or gains, the payout at maturity will be par plus 27.3%, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will be fully exposed to any ETF decline.

“I like it when you don’t need a big price increase to get a positive return. Also, the timing of these notes is pretty good,” said Kaplan.

Bear market

Kaplan analyzed the current market, which he views as bearish, reflecting on the respective cycles for equity and gold. His bet was that gold miners after turning negative will recover in time and magnitude to make the note profitable.

The overall market has been in a bearish cycle for some time, he noted. But bear markets show powerful reversals. In addition, equity markets and gold prices do not move at the same pace, he added. All those factors create a window of opportunity, which investors in the note may benefit from.

The Nasdaq and the Russell started to be in a bear market in November 2021 and the S&P 500 index followed in January 2022. But the bear market for the VanEck Gold Miners ETF began sooner, in August 2020. It was the fund’s highest point since 2012.

“Although GDX has gone through a series of rebounds, there’s still a downtrend underway,” he said.

VanEck Gold Miners ETF is listed under the ticker “GDX.”

“People often fool themselves thinking a bear market is over when they see several rebounds. But that’s precisely the nature of bear markets.

“Prices don’t drop in a straight line,” he said.

First to fall

Another important pattern regarding gold-related assets is the fact that they bottom ahead of the overall market, he said.

“GDX will hit a fresh low probably in February or March 2024; the S&P and the Nasdaq will be next... I suppose in the spring,” he said.

His assumptions, he said, were based on historical patterns.

First quarter, spring

The “major equity market rebound,” which began in October 2022 is poised for a sharp U-turn as its fragile foundations are momentum and speculation. The so-called “AI bubble” is not unlike the dot.com bubble of 2000 and the Nifty-Fifty of the early 1970’s, he said.

“We’re now probably going to see a much bigger drop than what we’ve seen before. So far this bear market has been pretty mild. But it’s not over,” he said.

He expects the next bottom in the overall stock market to happen in May or June.

“The spring may be the bottom for the year, not the bottom for this bear market,” he said.

He does not see the end of the bear market until 2025.

In the coming months and years, the market should drop significantly at times. The price declines will be followed by impressive rebounds, he said.

“It’s not unusual to see 50% rebounds in a bear market while the trend still remains negative,” he said.

Regaining strength

After scoring a low in the first quarter, preceding the bottom of the overall market, the VanEck Gold Miners ETF should also enjoy one of those relief rallies.

“The odds of a strong rebound for GDX are very high. Historically, just after bottoming, gold tends to recover significantly.

“Those rebounds happen quickly and it’s not unheard of to see the price double, sometimes triple in a short period of time.”

Such scenario should allow the underlying price to move back to positive territory by the time the notes mature, he predicted.

Value

The fundamentals of the asset class should also help.

“GDX is trading about 30% below fair value. In comparison, AI stocks are trading 200% above fair value,” he said.

“You should always want to buy undervalued assets. They tend to go up much more and to lose less money than any overpriced asset.

“People tend to forget this basic rule of investing.”

Good bet

Based on this sequence, the notes should reward investors. Whether it would have been more profitable to buy the ETF outright depends on investors’ confidence levels.

“You could be missing some of the upside. But the note offers an alternative to a pure ETF play. It gives you a higher percentage chance of getting paid.

“It’s not about maximizing your gain. It’s about maximizing your chances of scoring a pretty good return.

“I think this is a good gamble,” he said.

The notes are guaranteed by Bank of America Corp.

BofA Securities, Inc. is the underwriter.

The notes settled on Thursday.

The Cusip number is 09710N259.

The fee is 1.5%.

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