Morgan Stanley’s $3.59 million PLUS on SPDR Gold, Silver ETF offer contrarian bullish bet

By Emma Trincal

New York, Nov. 18 – Morgan Stanley Finance LLC’s $3.59 million of 0% dual directional buffered PLUS due Nov. 14, 2025 linked to the SPDR Gold trust and the iShares Silver trust are designed for contrarian investors bullish on gold and silver. The exposure to the undervalued ETFs, which are trading near bottom and the growth-oriented structure made the notes particularly compelling for those investors, said a contrarian portfolio manager who is bullish on the precious metals.

If the worst-performing ETF gains, the payout will be par plus 176% of that ETF return, according to a 424B2 filing with the Securities and Exchange Commission.

The payout will be par plus the absolute value of the worst-performing ETF return if the worst performing ETF declines by no more than 10%.

Otherwise, investors will lose 1% for every 1% that the worst-performing ETF declines beyond 10%.

Unlimited upside, buffer

Both the structure and the underlying ETFs are favorable to investors, said Steven Jon Kaplan, founder and portfolio manager of True Contrarian Investments.

The two underlying ETFs are commodities, not equity funds. The iShares Silver trust (ticker “SLV”) tracks the price of silver; the SPDR Gold trust (ticker “GLD”) reflects the performance of the price of gold bullion.

“At least you have no cap, which is a positive. Having a buffer is also a very good thing. It’s better than no protection at all, and also better than having a barrier. No cap and buffered protection...I like the two aspects of this particular arrangement,” he said.

“The dual directional feature doesn’t hurt. That’s an additional benefit,” he said.

Undervalued

The downturn incurred by both assets since 2020 has created a valuable buying opportunity, another attractive aspect of the deal, he noted.

“It’s been a long time since GLD and SLV were at their highest point. They haven’t been going up for a long time, so they have become unpopular. Gold peaked in August 2020 then went down for two years. People started to be discouraged and gave up,” he said.

“Lately you had a little bit of a rebound, but it’s a very recent trend.”

Silver topped at the same time as gold in August 2020.

“Both hit a high well ahead of the peak in the U.S. stock market, which happened in the beginning of this year.”

Due to their negative performance, both gold and silver are still out-of-favor.

“Many headlines came up slamming gold for all sorts of reasons.

“Those media reports had a variety of narratives to justify that gold was no longer needed because we now have cryptocurrencies. We know now how ludicrous it was to compare a 14-years industry with gold, an asset that’s been used since the Ancient World,” he said.

Commitments of traders

When picking securities, Kaplan looks for signs of undervaluation. For stocks, he pays attention to the buying and selling activity of insiders, using insider transactions filed with the Securities and Exchange Commission.

For commodities, he analyzes the commitments of traders, which are published weekly by the Commodity Futures Trading Commission. The report shows how large speculators and commercial interests are trading commodities compared to market prices.

Commercial traders, according to the CFTC, are traders using futures contracts to hedge a particular commodity. They’re usually “commercially” engaged in the business related to the commodity they’re hedging, for instance the jewelry trade in the example of gold or silver.

Kaplan has found in these reports some bullish signals, especially from the commercial traders.

“Lately, commercials decided they don’t want to hedge their positions anymore. We have the lowest commercials net short positions for gold in four years,” he said.

“If you use gold for your business and you stop hedging the precious metal, obviously you’re not expecting a drop in the price of the commodity, otherwise you would be shorting.”

The trend for silver was even clearer.

“Silver commercials went net long. This is extremely rare.”

As with insiders for stocks, the sophisticated hedgers and traders tend to be ahead of the market.

“Right now, both gold and silver are trading at bargain prices.

“Gold hit a four-year low on Sept. 27. Silver bottomed around the same time.

“This is perhaps the best part of the notes. It’s tied to assets, which are offering a good bottom opportunity.

“Add to that the uncapped upside and leverage and this note has the potential to generate very attractive returns.”

Worst-of exposure

One caveat may be the worst-of payout. For Kaplan, the issue was not correlation but divergences in volatility.

“Both assets tend to move in tandem. However, silver is more volatile, so if both go down, chances are silver will go down more,” he said.

“While they’re clearly correlated, the difference in volatility will create some divergences. Silver is 50% more volatile than gold in the long run.”

But the trend was overwhelmingly bullish.

“Both ETFs were very undervalued two months ago. Both are still good bargains so they’re likely to be higher in three years,” he said.

“Another good sign is the relative performance of gold and silver versus U.S. large cap growth stocks. The precious metals tend to move inversely to large-cap. Since the big growth names are losing value, silver and gold should perform better.

“This note offers a very interesting potential for contrarian investors.”

The notes are guaranteed by Morgan Stanley.

Morgan Stanley & Co. LLC is the agent.

The notes settled on Nov. 14.

The Cusip number is 61774HUN6.

The fee is 0.75%.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.