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Reverse Gold Linked Notes (RGLNs)
At a Glance
Ability to express a particular view on gold price movements
Potential to earn an enhanced return if the performance of gold is in line with the expected view
Relatively short investment tenors
What are RGLNs?
RGLNs are a type of structured note that uses gold as the underlying asset.
Who are RGLNs Suitable For?
RGLNs are suitable for investors who want to improve returns from their gold holdings when their view of the gold market is stable or mildly bearish.
If they had a strongly bearish view, they might prefer to sell the gold outright at the prevailing market price.
RGLNs are sophisticated investment products that carry significant risks and are not suitable for investors who do not comprehend the product or are risk averse.
How do RGLNs Work?
Investors deposit the agreed amount of gold to the RGLN issuer. They agree on a “strike” price, which is at a premium (or above) the “spot” market price.
For example, a 102% “strike” means that the RGLN issuer will take ownership of the deposited gold if the “spot” hits or goes above 102% of the initial price. The investor will then receive his principal in cash plus an agreed interest amount.
If the “spot” for the deposited gold is below the “strike”, the investor gets back his deposited gold plus a cash amount that represents the interest earned.
Illustrative Example of a RGLN:
|Investor invests in||300 ounces of gold|
|Strike rate or price||102% or US$1,754|
|Interest amount||US$2,631 (US$526,200 x 6% x 30/360)|
|Scenario||Above Strike Rate?||GLN Exercised?||Redemption|
|1||Yes||Yes||Principle + Interest|
|2||No||No||Gold + Interest|
Benefits of RGLNs
Investors may earn an enhanced return if their view of bullion spot rate movements are accurate.
An RGLN can be tailored to suit investors’ needs, based on their choice of certain parameters, including the strike rate and tenor.
An RGLN’s tenor is generally short term, ranging from one month to a year.
Allows investors to diversify their portfolio through exposure to gold.
Risks of RGLNs
Gold prices may move adversely against the investor.
As gold is priced in US$, investors face the risk of foreign exchange fluctuations, which in turn may affect returns.
RGLNs are issued by financial institutions and investors are exposed to the credit risk of the issuer.
To understand the product-related terms, visit our Glossary.
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