Gold linked structured products

Gold has always been a fascinating underlying in the investment world with its status as a key commodity, pseudo-currency and inflation hedge. As such it has attracted attention in structured products markets as an interesting alternative to equity indices and stocks. Its usage in structured products has been through some different cycles in recent years.

A safe haven down the ages

Gold is seen as a safe haven when markets get volatile and in times of long-term uncertainty caused by macro-economic themes. There are many such factors in play at the moment: US-China trade wars, widespread protectionist and nationalist behaviours, continued oil price movements, and paralysis in Europe caused by debt and the Brexit situation.

In the 1970s and 1980s Gold had a very important role to play in the world economy but this receded significantly in more recent times dominated by bull markets and tech developments. As described above we have arguably returned to an environment where the one universal safe asset is more important again. It says something of human nature and investment patterns that this commodity can play such a pivotal role.

Diversification today

Gold can be used to hedge against volatility and to diversify within a portfolio by providing defensive qualities especially when there is uncertainty in the global economy. In 2017, the amount of structured products sold with Gold as an underlying was EUR 4.3bn which was not enough to put it in the top ten underlyings for the year. In 2018, the sales volume of products linked to gold increased sharply to EUR 8.4bn, putting it in the top ten. Year-to-date sales of gold linked products have already surpassed its 2018 levels with the amount of structured products sold already at EUR 10bn. Therefore, it is no surprise that Gold is currently in the top three underlying assets in terms of sales volume within structured products with EUR 3 bn being sold linked to Gold in the last three months. In fact, Gold has only been beaten as an underlying by EUR/USD currency products and baskets linked to the Eurostoxx-50, HSCEI and the S&P 500.

At the start of 2019 gold was priced at $1280 and by October had risen by 15% to around $1500. It is no surprise that gold as an underlying has seen an increase in demand causing this price spike. In 2019 there have been fresh development in the US/China trade war as well as tensions between US and Iran.

Global demand

Demand for gold comes from different sectors including a growing Jewellery market fuelled by middle classes in emerging economies particularly in Asia. Central banks have also increased their gold reserves as economies bounced back from the 2008 recession. There has been an increased preference for this rather than buying bonds at near zero interest rates or holding currency (particularly the US dollar) to avoid over exposure or in some cases for political reasons.

In summary, we conclude that the recent global economic and political situation has turned attention back to gold with the price support that implies. This has in turn made it an increasingly popular choice for investors who have heard the arguments and seek alternatives and diversification.


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