JPMorgan’s $1.58 million autocalls on Gold Miners to offer inflation hedge, safe harbor

By Emma Trincal

New York, April 12 – JPMorgan Chase Financial Co. LLC’s $1.58 million of autocallable contingent interest notes due Jan. 10, 2024 linked to VanEck Gold Miners ETF appeared well-priced for investors seeking exposure to an increasingly popular asset class, which remains reasonably valued, advisers said.

Investors will receive a coupon of 11.5%, paid monthly, if the underlying fund closes at or above its 70% coupon barrier on the related monthly observation date, according to a 424B2 filing with the Securities and Exchange Commission.

Starting July 5, the securities will be called automatically at par if the ETF closes at or above its initial share price on any quarterly review date.

At maturity the payout will be par unless the fund closes below its 65% trigger level, in which case investors will be fully exposed to the decline of the fund.

Safety bid

“Interesting maturity. It’s a 21-month. Matures in January 2024. I’m sure they did that to push back the taxes. Anything they owe won’t be due until the following year,” said Tom Balcom, founder of 1650 Wealth Management.

Balcom said that gold miners are not as common as equity indexes, but their popularity is growing.

“People are looking into miners and commodities right now given the high inflation numbers and the uncertainty in the world,” he said.

“Investors are not just worried about inflation. They’re worried about what the Fed is trying to do to fight inflation, which is essentially rising rates. The yield curve has flattened. That’s a concern too. People are beginning to think a recession is in the cards.”

On Tuesday, the labor department reported an 8.5% year-over-year increase in the consumer price index in March, its fastest rise since December 1981.

The rapid surge in inflation has forced the Federal Reserve to adopt a more hawkish stance and to move Federal Fund rates higher. The central bank raised the rates by 25 basis points in its last meeting in March, the first increase since December 2018. It plans to raise rates during its six remaining meetings this year.

“Gold can be used both as a hedge against inflation and as a safe harbor, which is timely. We just happen to have an inflationary environment and geopolitical tensions.”

Coupon

The 11.5% coupon was high enough to even accommodate bulls, according to this adviser.

“It’s a double-digit return. If you’re bullish on gold, it seems like a pretty good trade. You could underperform the ETF of course but not many people are going to be unhappy with 11.5%,” he said.

The coupon size is in large part determined by the choice of the underlying.

“They chose the gold miners and not gold because stocks are more volatile so they can produce a higher coupon,” he said.

Allocation

If he was to use the notes, Balcom said he would not place them in his equity or even commodity buckets. Instead, the notes would find their place in his fixed-income portfolio.

“Look at the coupon. Yields are low these days. This would be a good fixed-income replacement. It’s not principal-protected, but to me, a 35% protection at maturity is a healthy downside,” he said.

Decent entry point

A financial adviser said the deal was reasonable given the entry point.

“At least gold miners are not overvalued as many other things are right now,” he said.

Gold has been through a very long bull market, which does not mean current valuations are rich, he added.

“The bull market in gold started in November 2000 but it had a number of corrections, which means it’s not overpriced like QQQ is right now,” he said.

He was referring to the Invesco QQQ Trust Series 1, an ETF that tracks the Nasdaq-100 index.

“The gold miners ETF dropped at a very low level in March 2020. It recently made another low in January. In fact, it made a lot of higher lows. As a result, it’s moderately undervalued. It’s not a bargain, but it’s trading at a decent level,” this adviser said.

Correct timing

The timing for a trade on the gold miners in relation to the rest of the equity market was also favorable.

“Gold does best when coming down from a growth stock bubble burst,” he said.

After growth stocks peaked in September 1929, January 1973, March 2000 and January of this year before falling, gold and gold miners started to take off, he said.

Between November 2000 and December 2003, in the midst of the bear market that followed the burst of the dot.com bubble, the value of gold increased tenfold, he noted.

Later call

For the most part, the terms of the notes were acceptable, he said, including the 70% coupon barrier.

“It would be better if it was lower than that. But we already had a pullback in January, so it seems like a reasonable barrier,” he said.

“The 11.5% coupon is also fair.

“The most likely scenario is that you’ll get called. However, I don’t see the notes getting called away too soon because we’re going to have a pullback in the stock market, which will spill over into gold miners. You might get called toward 2023 rather than in 2022.”

A few details would have made the structure more attractive.

“Having longer payment periods, like quarterly or semiannually rather than monthly, would have been more favorable to investors as well as a longer call protection period,” he said.

“Cumulative coupons would have been ideal.

“But the note is still pretty attractive.”

The notes are guaranteed by JPMorgan Chase & Co.

J.P. Morgan Securities LLC is the agent.

The notes settled on Friday.

The Cusip number is 48133DR85.

The fee is 0.61011%

© 2015 Prospect News.
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