Structured Note Buyers Renew Gold Bets as New Fed Chair Looms

U.S. investors are increasing bets on structured notes that profit on gains in gold, as its price rebounds on the prospect of the Federal Reserve keeping interest rates low and military action in Syria.

Banks in August sold $107.4 million of notes tied to gold or companies that mine the precious metal, the biggest month since January, according to data compiled by Bloomberg.

Gold prices will stay high because whoever succeeds Fed Chairman Ben S. Bernanke probably won’t raise interest rates, said Douglas Groh, co-portfolio manager at Tocqueville Asset Management LP, in a telephone interview in New York. Bernanke’s term expires in January.

“I think the outlook for gold is still very positive,” Groh said. “We’re going to see more easy monetary policy under a new Federal Reserve chairman.”

The Fed may begin trimming asset purchases later this year and end them around mid-2014 if the economy improves in line with officials’ expectations, Bernanke said June 19. The Fed plans to hold its target interest rate near zero as long as unemployment remains above 6.5 percent and the outlook for inflation doesn’t exceed 2.5 percent.

The prospect of U.S. military intervention in the Middle East also may make gold more valuable because investors would view it as a “haven,” Groh said. “If a coalition does go to war and does implement some type of discipline on Syria, gold would likely have a very positive response initially,” he said.

Military Action

President Barack Obama said Syrian forces used chemical weapons to kill more than 1,400 people in a Damascus suburb. A U.S. Senate panel yesterday voted to authorize a limited military operation in the country, the first step toward congressional endorsement of the effort.

The spot price of gold rose 16 percent from a low of $1,200.67 an ounce on June 27 to $1,391.57 an ounce yesterday.

The largest structured note offering in August that benefits from gold rising was $40.3 million of two-year notes tied to the NYSE Arca Gold Miners Index sold by Bank of America Corp. (BAC) The securities, issued Aug. 29, yield three times the gains of the benchmark, with returns capped at 50.19 percent and protection against 5 percent of losses, according to a prospectus filed with the U.S. Securities and Exchange Commission. The bank, which charged 2 percent in distribution fees, estimated the note’s initial value at 95.9 cents on the dollar.

Susan McCabe, a spokeswoman for Bank of America, declined to comment on the securities.

Investors bought $38 million of notes tied to gold miner and producer Freeport-McMoRan Copper & Gold Inc. (FCX) last month, Bloomberg data show. That’s the largest sales month for the securities since February.

Banks create structured notes by packaging debt with derivatives to offer customized bets to retail investors while earning fees and raising money. Derivatives are contracts whose value is derived from stocks, bonds, commodities and currencies, or events such as changes in interest rates or the weather.

To contact the reporter on this story: Kevin Dugan in New York at kdugan4@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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