What are Structured Notes

No one will easily forget the turbulent times that 2008 and the early part of 2009 brought with them. Bubble after bubble burst; house prices hit rock-bottom; formerly ‘stable’ companies crumbled into insolvency by the ‘bucket-load’. The markets truly suffered a crisis that has been seared into the minds of financial professionals.

How can, then, individuals and institutions alike, now invest confidently into financial products?

How can they make asset allocation decisions beyond simply saying: ‘100% of my portfolio into Cash’ while still keeping the peace of mind that their initial capital will be preserved?

Simple.

Structured Products.

A Structured Product or Note is an investment vehicle that can be written or ‘structured’ in many ways, according to investors specifications; all range of asset classes, maturity dates, risk / return levels, liquidity, and even prices can be accommodated for!

Benefits:

-       Capital Protection

o   They can be written to guarantee to return 100% of your initial investment

-       Auto-Call Potential

o   They can be written so that, once certain criteria have been met, the note is redeemed and the growth is realised

As a reference, an example is described below. It is a note that significantly reduces the risk by giving up some potential return. It invests into 4 soft commodities; Corn, Sugar, Cotton and Soybeans.

-       100% capital protection, potential annual return of 10% per annum

o   Regardless of the performance, you will receive 100% of your initial investment, but you can ‘only’ receive 10% per year

-       3 years maturity

o   The note will ‘mature’ or finish in 3 years, in which case you will either receive your initial investment, or the growth up to 10% / annum, whichever is higher

This is a great example of how investors can invest safely into an ‘interesting’ asset class, with only a medium term commitment for tying up their money!

New notes are being written weekly, so for an updated list or for more information, just contact the Portfolio Team at Montpelier.  

Silver - Price could double by the end of the year

Were you cursing at your computer screen when silver nearly tripled during the short 9 months from September 2010 to May 2011? Silver at $20 seemed like an insurmountable threshold for quite some time. This caused many silver investors to give up, completely missing the ensuing ride. I believe silver is about to offer a similar ride. While it is unlikely to match the 180% advance mentioned above, look for silver to make new highs in the coming months, with the potential to double to $65 by year end.

Following the record gains in silver during late 2010 and early 2011, the metal has since crashed towards $25 and sentiment has crashed along with it. The threat of euro nations defaulting, banks announcing they are, well, bankrupt, and a series of other factors have scared away many of the Johnny-come-lately silver bulls. I think too many investors are underestimating the power of the central banks. While I agree they are running out of options, it seems that their ability to kick the can down the road has yet to expire. Given that the United States is heading into election season and President Obama is in full campaign mode, I expect the administration to pull out all stops in order to continue the illusion of economic prosperity a while longer. Every economic fire of consequence is being extinguished with fresh liquidity, more funny money or new legislation. In case you missed it, QE3 has been in full force for quite some time, albeit executed is a somewhat stealth manner.

The implications for silver (and gold to a lesser degree) are going to be incredibly bullish. Absent a deflationary sovereign default that spirals out of control and takes down major banks with it, stocks will continue to creep higher in volatile trade throughout the year. Once fear begins to subside, look for precious metals to come roaring back to new highs by mid-year. Whenever the next financial crisis finally hits, we are likely to witness a new injection of quantitative easing that is many magnitudes stronger than that of 2008.

Will a major debt default pull down gold, silver and mining stocks with it? Absolutely.

Will it last? Not likely.

Investors are a predictable bunch. They always overshoot on emotions in one direction or another. A rush for liquidity and the perceived “safety” of government bonds or U.S. dollars will be incredibly short-lived and viewed in retrospect as immensely short-sighted. Everyone that rushed for the door by dumping real assets will soon regret their folly. When the fear subsides and some semblance of rational thought returns, the realization of the worthlessness of government paper will be widespread and cause a mass exodus of fiat money.

So while it is prudent to hold a decent amount of cash in the short term, hoping to buy the irrational dip, the medium to long-term investor might consider buying silver aggressively at this juncture. In my view, commodity prices are either going to continue grinding higher throughout the remainder of the year, or there will be a short and steep dip, following by a resumption to new highs. Either way, the silver price has a long way to go before reaching previous inlfation-adjusted higher. It would need to climb to $150 to reach its 1980 high using officially-suppressed inflation statistics and closer to $300 using honest inflation statistics. Seeing as you can buy silver at $32 today, the upside potential remains absolutely huge.