When markets are anticipating a recession, Gold becomes an attractive commodity as investors seek a safe haven from equity markets during times of uncertainty. Its value usually has a negatively correlated relationship with equities during a recession or when one is looming. Indexes and ETF which are exposed to Gold within the mining sector in the industry strongly follow the gold price for obvious reasons. We will be exploring such correlations with the ‘VanEck Vectors Gold Miners ETF’ used as an underlying in a structured product which recently matured.
Correlations between asset classes
We analysed the time series for the S&P 500 Total Return, Gold and the Gold Miners ETF over the last three years to match the maturity of the structured product we are studying. We found that there was a high correlation between the ETF and gold (81%) and a very low correlation between the ETF and the S&P 500 TR Index (5%). This is somewhat surprising given that the ETF is made up of equities. The correlation between the S&P 500 TR and Gold was almost exactly zero over the time period showing that in different market cycles Gold can move independently of equities.
The ETF has a much higher correlation with gold over this time period, and we can also see that the ETF was much more volatile in when gold increased in price, the ETF increased in value at a significantly higher rate and then accordingly on the way down when the price of Gold fell. 2016 saw the biggest spike within the ETF as it increased in value by 120% from 4th January 2016 to 12th August 2016.
Strongly performing equities
Three equities that were major holdings within the ETF at the time, rose very strongly. These were Regis Resources Limited (19%), Saracen Mineral Holdings Limited (19%) and Resolute Mining Limited (14%), making up 52% of holdings which would explain why we saw such massive swings within the ETF when gold moved in price. All three companies are engaged in gold mining and mineral exploration. During the same period (4th January 2016 to 12th August 2016) Regis increased in value by 76%, Saracen by 172% and Resolute increased in value by 664%. This can also highlight how narrow themed based ETFs can be.
Timing the Auto-call
The retail structured product “S&P/TSX Gold Miners Autocallable Notes Series 2”, which was linked to the performance of the underlying VanEck Vectors Gold Miners ETF, matured recently. This note was issued by Scotiabank in the US market. Kick-out products often kick out on the first date, but this product did not. The ETF took a sharp downward turn in the first three months after the strike date of September 2016 and fell over 30%. It stayed nearly flat until May 2019 but then rose significantly to be back above the strike level by September. This allowed a successful positive return on its final valuation date.
If the investor had invested in the ETF over the same time period as the structured product, they would have received a return of just 3.42% over three years. However, an investor who had purchased this structured product saw a return of 41.25% (non-compounded) for the three year period. It should be noted however that a direct investment in gold over the same period would have returned more than twice the initial capital. However, this doesn’t beat the return an investor would have received had they directly invested in gold. Including capital, an investor would have received 207% (not compounded) over the same time period.
In summary, although Gold outperformed both the ETF and the structured product, the structured product still provided very high returns and significantly outperformed its underlying making it an excellent investment.
Investment Structured Products