Features of bonds linked to the value of gold

International investors continue to reduce investment in gold. The assets of exchange-traded funds investing in the precious metal have decreased since the beginning of the year by almost 40 tons, to 2,623 tons. Russian investors continue to buy metal as a hedge against ongoing currency risks. An alternative would be bonds with their value pegged to the price of gold. In addition to this, a coupon is paid on such securities, but its size is lower than on ruble bonds of the same issuers.

Betting against metal

Amid high US dollar debt rates, international investors are showing little interest in gold. According to Bloomberg, in the first three weeks of 2024, the assets of exchange-traded funds focused on investments in the precious metal fell by almost 40 tons, to 2,623 tons. Fund assets have not fallen this low since January 2020. Data from Emerging Portfolio Fund Research (EPFR) also speaks about metal sales.

According to Kommersant’s estimates, based on a Bank of America report (taking into account EPFR data), during the period under review, the volume of funds withdrawn from gold funds exceeded $2 billion.

In conditions of tight monetary policy by the Federal Reserve and the ECB, investors prefer to keep their savings in higher-yielding government bonds and money market funds. Unlike gold, which does not pay a coupon, short U.S. Treasuries maturing under one year currently yield between 5.2% and 5.4%. This is only 0.2–0.5 percentage points below the maximum set more than 20 years ago.

Noble Affection

Despite high ruble rates, Russian investors remain interested in investing in gold as an option for insurance against currency risks. According to VTB, last year the bank sold 33.2 tons of gold bullion to individuals, with 7.3 tons in December alone. There is also continued interest in “paper” gold in the form of mutual investment funds (OPIFs and BPIFs investing in gold). According to Kommersant’s estimates, based on Investfunds data, in 2023, private investors invested more than 3.8 billion rubles in gold funds. More than 300 million rubles. has been invested in them since the beginning of this year.

In 2023, a new product appeared on the Russian market – corporate bonds, the cost of which depends on the price of gold.

The first such securities were issued by the gold mining company Seligdar. In May last year, the issuer placed a five-year issue worth 11 billion rubles, and six months later – a six-year issue worth 6.8 billion rubles. Last week, the gold mining company Polyus offered 5.5-year securities worth 15 billion rubles.

The nominal value of such bonds is tied to the cost of 1 gram of gold established by the Bank of Russia (5.8 thousand rubles as of January 27). This discount price is calculated daily based on the current gold prices on the London spot metal market at the time of calculation, and is converted into rubles at the official US dollar exchange rate valid on the day following the day the discount prices are established. Thus, it turns out that the value of the bond will increase not only with an increase in world gold prices, but also with an increase in the dollar exchange rate on the Russian market.

Coupon surcharge

Unlike buying physical metal, buying bonds does not require the investor to resolve the issue of storing it. In addition to this, the bond can be sold on any trading day if there is demand, while bullion is not purchased by banks in all branches. “Seligdar’s bond issues are quite liquid—a living order book, a narrow spread, turnover per day of 0.5–1% of the placement volume,” notes Alexey Bulgakov, head of the debt market analytics department at Renaissance Capital. When selling and buying such bonds, you need to pay a brokerage commission, but it is many times lower than what you will have to pay when selling a gold bar to a bank (the spread between the sale and redemption prices can be 5–15%). In the case of “paper” gold in the form of mutual fund shares, a management company commission is charged, which is 0.2–1% for exchange-traded funds and 2–2.5% for open-ended funds. When selling a share of an open investment fund at a bank branch, the redemption price is usually lower than the real price; the discount can reach up to 2%.

Another important advantage of gold-linked bonds is that they pay a regular coupon.

For both issues of Seligdar, the coupon is paid quarterly and amounts to 5.5% per annum. In the case of Polyus, the coupon will be semi-annual and amount to 3.1% per annum. Due to the fact that the nominal value of the bond is floating, the size of regular payments will change, that is, if the value of the metal increases, the price of the bond and the size of the coupon will increase. As the price of gold decreases, the value of the bond and the coupon will decrease.

As Alexey Bulgakov notes, the issues have a relatively small coupon, and if the securities are held for a long time, revaluation is likely to be the main component of the profit, so tax benefits are possible. The broker withholds personal income tax from the coupon received, while income from the sale of a security will be exempt from tax if it has been held for more than three years.

Variable denomination

At the same time, it is worth taking into account the high volatility of precious metal quotes. Thus, over the past three years, the price of gold on the world market has varied in a fairly wide range – $1.6–2.1 thousand per ounce. Moreover, the level of $2 thousand per ounce was exceeded four times, and after each exceeding the price rolled back by 10–20%. In November 2023, quotations for the first time in history exceeded $2.1 thousand per ounce, after which they decreased by 5%, but are still above $2 thousand. In general, over the past ten years the metal has risen in price by 62%.

The ruble price of gold is even more volatile, which also depends on the dynamics of the dollar exchange rate. In particular, in 2022, the price of gold, according to the Central Bank, fluctuated in the range of 3–7.7 thousand rubles/year. In 2023, the range narrowed to 4.1–6.2 thousand rubles/year. Over ten years, the ruble price has increased 4.5 times, to 5.8 thousand rubles, which is largely due to the increase in the US dollar exchange rate from 33 rubles/$ to almost 90 rubles/$. Senior analyst at BCS World of Investments Dmitry Kazakov believes that this year the average gold price will be $2,050 per ounce, or 5.56 thousand rubles/year. The key drivers will be the easing of US monetary policy and the development of the geopolitical situation.

In such investments, it is worth taking into account the credit risk of the issuer. Portfolio manager of the Pervaya Management Company, Vladislav Danilov, recalls that the Seligdar company has a credit rating of A+/AA-, which indicates a moderately high level of creditworthiness, and Polyus has a rating of AAA, which is the highest credit rating. The higher the credit rating, the lower the risk that the issuer will not fulfill its obligations to investors.

Vitaly Gaidaev