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Gold Linked Notes (GLNs)
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 GLNs?
GLNs are a type of equity-based structured note. They are similar in structure to Equity Linked Notes (ELNs), except the underlying is gold, rather than stocks. They are often used by investors to improve returns on cash holdings, when they have a stable or mildly bullish view of gold.
Who are GLNs Suitable For?
GLNs are suitable for investors who are looking for a higher return on their savings or current account deposits. But instead of owning gold outright, they can invest in GLNs.
If they have a strongly bullish view of the gold market, they may prefer to buy gold directly at the prevailing market price.
But if prices fell, they could be “put” the underlying gold at a price higher than the prevailing market price at maturity.
GLNs 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 GLNs Work?
In discussion with their bankers or stock brokers, investors agree on a certain number of ounces of gold and the principal amount minus a discount. That discount represents the yield on the GLN.
For example, if the principal amount on 330 ounces of gold is US$544,170, and the actual investment amount is US$540,565.96, the yield is the difference between the two: US$3,604.04. This represents an annualised yield of 8% on the actual investment amount (see Illustrative Example below).
The GLN has a strike price, which is at a discount to the “spot” market price and is expressed as a percentage of the spot. For example, a 97% strike means that the GLN issuer will deliver the gold to the investor when the gold price hits or falls below 97% of the initial market price when the note matures. The investor will receive the agreed ounces of gold in his gold account.
If the gold price is above the “strike” level on maturity of the note, the investor gets his principal in full, which is his actual investment amount plus the yield.
Illustrative Example of a GLN:
|Investor invests in||330 ounces of gold|
|Strike rate or price||97% or US$1,659|
|Actual investment amount||US$540,565.96|
|Yield||8% p.a. or US$3,604.04 |
(Principal – Actual investment amount)
|Scenario||Above Strike Rate?||GLN Exercised?||Redemption|
|1||Yes||No||Actual investment amount + Yield|
Benefits of GLNs
Investors may earn an enhanced return if their view of bullion spot rate movements are accurate.
A GLN can be tailored to suit investors’ needs, based on their choice of certain parameters, including the strike rate and tenor.
A GLN’s tenor is generally short term, ranging from one month to a year.
Allows investors to diversify their portfolio through exposure to gold.
Risks of GLNs
Gold prices may move adversely against the investor.
As gold is priced in US$, investors face the risk of foreign exchange fluctuations, which in turn may affect returns.
GLNs 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.