Citi’s callable contingent coupon notes on gold miners, silver ETFs offer fair entry points

By Emma Trincal

New York, April 9 – Citigroup Global Markets Holdings Inc.’s callable contingent coupon equity-linked securities due April 13, 2023 linked to the worst performing of iShares Silver Trust and the VanEck Vectors Gold Miners exchange-traded fund offer a reasonable entry point, especially for the gold miners ETF, said Steven Jon Kaplan, founder and portfolio manager of True Contrarian Investments.

The notes pay a contingent quarterly coupon at an annualized rate of 11% if each ETF closes at or above its coupon barrier level, 75% of its initial level, on the valuation date for that period, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be callable in whole at par plus any coupon due on any quarterly valuation date after six months.

If the notes are not redeemed early, the payout will be par unless any ETF finishes below 75% of its initial level, in which case investors will lose 1% for every 1% that the least performing ETF declines, payable in either shares of the worst performer or cash at the issuer’s option.

“GDX is still at a very low point, which is good. SLV is not as undervalued because it went through a social media call buying craze in February. But it’s still at a decent level,” he said.

The ticker “GDX” and “SLV” designate the VanEck Vectors Gold Miners ETF and the iShares Silver Trust, both of which are listed on the NYSE Arca.

Bullish on gold

Kaplan focused on his favorite underlying, which is the gold miners ETF.

“In the beginning of March, GDX was at its lowest point since the high of August. It was also at its lowest point since April of last year. The price has rebounded since early March but it’s still relatively low which is good for the note,” he said.

Last August, gold hit the $2,000 an ounce mark.

“We saw big inflows coming in. Gold got a lot of attention then,” he said.

“New investors began to pile in. But as always, anytime you get that type of excitement, a period of weakness follows. That’s what happened with gold very quickly.”

As gold went out of favor, investors put more emphasis on chasing technology stock returns. Starting late September, the Nasdaq was moving up in the opposite direction of the gold miners ETF.

“GDX stopped dropping in early March. It is now forming higher lows, a sign that it’s likely to be higher a year from now,” he said.

Based on the entry prices for both underlying assets, Kaplan was confident about the outcome of the notes.

“You have a pretty good chance of being called away in nine months, perhaps even in six,” he said.

“I suppose they’re more likely to call you if the price is up.”

Tech is out, inflation is in

Kaplan’s prediction is based on a bullish outlook for gold.

“The S&P 500 is making new highs. It just broke the 4,000 mark. The Nasdaq made new highs in February but has not reached that level since even though it’s close,” he said.

As long-term interest rates have been rising along with inflation expectations, the high valuations of tech and growth companies won’t be sustainable for the long haul, he said.

“You can’t have such high P/Es forever.

“Apple peaked in January, Amazon, in September. We just had a big selloff in the sector.”

There are no reasons to assume the tech selloff is about to end even though the Nasdaq has regained traction over the past two weeks, according to Kaplan.

If his bearish outlook on the Nasdaq is correct, the implication for gold and silver should be positive.

“When people move away from the tech names, they go for hard assets and safety,” he said.

As he often does, Kaplan looks at historical price patterns. He pointed to the dot.com crash in 2000, looking at the performance of the NYSE Arca Gold Bugs index, which is listed under the ticker “$HUI.”

“Once the Nasdaq crashed, the $HUI started to rally. In three years, it increased more than seven times,” he said.

“This is a known historical pattern. It’s not uncommon to see a gold rally after growth stocks take a hit.”

The same phenomenon happened going back to 1972 ahead of the stock market crash which began in January 1973, he noted.

“We had a two-year bull market in gold.”

The correlation between gold and tech stocks may vary.

“Whether you’re at the beginning or the end of a bear market will make a difference. During big down days, gold tends to go down too. And in the up days, gold is up much more. They’re not uncorrelated,” he said.

“During big down days, people sell everything. But even in a severe bear market, you don’t have big drops every day. It tends to be gradual.”

Gold should benefit from the shift out of the megacap stocks because it offers a replacement when options are limited.

“It’s the main driver,” he said.

“The selloff in tech is likely to hit other kinds of assets. And when other kinds of assets do poorly, more people sell the underperforming assets. That’s when gold begins to look like a good place to go because it’s a different kind of investment. It’s something that doesn’t depend on the strength of the economy. It’s a hedge against a number of things, inflation, in particular.”

After the plague

Kaplan offered an unconventional post-pandemic scenario, which combines falling stock prices and inflation.

“With the pandemic ending, people will spend money. The problem is they don’t have money at the bank. “A lot of the money is invested in the market. So, you could have more spending induced by people selling stocks to raise cash,” he said.

Such a gloomy scenario in which inflation coexists with a bear market has historical precedents.

“We had exactly the same pattern when the Spanish flu ended in 1918. People took money out of the market just after the pandemic and they spent money. This led to the combination of a falling market and rising inflation. These are historical patterns investors too often ignore.”

Silver mania

Next Kaplan examined the value of the iShares Silver Trust.

“SLV is similar except it’s not a fund of mining companies. It’s the metal itself,” he said.

Online investors in late January fueled a rally in silver pushing up the ETF share price to its highest level since 2013.

The sudden surge was attributed to Reddit, the same social media platform whose readers turned traders had just pushed the price of GameStop Corp. and AMC Entertainment Inc. to sky-high levels.

The share price of the iShares Silver fund rose more moderately – up 22% from mid-January to Feb. 1, – then dropped 21% to $22.13 on March 30.

“Now it’s back up a little bit. But it’s still lower than what it was back in February,” he said.

The ETF share price closed at $23.41 on Friday.

“It’s not quite as good as GDX because it didn’t go down as much.

“What you saw with SLV was a very brief excitement, enough to flush out the shorts.”

Social media moving stock prices is nothing new, he said.

“In 2000, you had chat rooms, investment clubs. Everybody wanted to buy Internet stocks for fear of not making as much as their neighbors and friends.

“Then the Nasdaq crashed, dropping 83.6% in just a few months.

“Today we have young investors with short attention spans trading tips on social media. They still believe the market will go up forever.”

The big picture

Looking at the worst of underlying, Kaplan said his preference would be the silver trust.

“I’m pretty sure the worst-of is going to be the SLV. I prefer the undervalued one, which is GDX. It’s more likely to increase,” he said.

“Silver is not bad. It just tends to be more overvalued than the other one. If I had the choice, I would want GDX as the single underlying.”

The appreciation of the silver fund was brief and artificial. But it made the asset less attractive.

“Without the crowd frantically bidding on silver, it now would probably be trading 10% lower,” he said.

From the structure standpoint, Kaplan said he preferred the “snowball” type of payout, which offers a cumulative call premium.

“I would like the cumulative payout better than a coupon,” he said.

“In general, it’s a good feature to have. If there’s a sudden drop, you can make up for it later.”

The notes are guaranteed by Citigroup Inc.

Citigroup Global Markets Inc. is the underwriter.

The notes were expected to price on April 9 and settle on April 14.

The Cusip is 17328NNB0.

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