Taking The Mining Out Of Metals – A New Trifecta

Editor’s note: The following piece is an advertorial.

One of the things I enjoy most about EverBank is working with our team to develop and deliver new and innovative ways for clients to diversify their portfolios. From our one-of-a-kind WorldCurrency® deposit products to our unique Metals Select® offerings, we are constantly searching for new ways to help our clients achieve their financial goals.

My partners on the WorldMarkets desk have a deep knowledge of the global markets and use this knowledge to come up with a steady stream of new and exciting products. But over the years, we have found that you, the clients of EverBank and readers of the Daily Pfennig® newsletter, are some of our best sources for new product ideas.

This is the case with our newest MarketSafe® CD. Over the past couple of months, we have had two different MarketSafe CD series mature; both of which were based on the performance of metals. Many of the investors who owned these MarketSafe CDs have told us they would like to get reinvested into a similar MarketSafe CD. These requests came as no surprise since the Diversified Metals MarketSafe CD, which matured May 26th, paid a market upside payment of over 21% and the Gold MarketSafe CD, which matured April 22nd, had an even better market upside payment of just over 37%! I will point out that past performance is no guarantee of future performance, and the structure of these CDs is different than our latest offering. I share these figures with you to illustrate what prompted us to search for a new opportunity to base a MarketSafe CD on the performance of the metals markets.

Acting on these requests from our World Markets clients, our trader, Jennifer McLean, set out on a search for a structure that would work. Without diving too deeply into the background of the structuring of these CDs, the challenge Jennifer kept running into was that the combination of higher volatility in the metals markets and lower interest rates made offering a MarketSafe CD based on metals nearly impossible. With a recent drop in volatility and a small increase in interest rates, we were able to finally work out a structure that would allow us to offer the new MarketSafe® Power MetalsSM CD.

Making A Case For Metals
Regular readers of the Daily Pfennig® newsletter certainly shouldn’t need me to explain to them the many reasons why adding exposure to metals is a good thing for most portfolios. The diversification benefits alone of adding the non-correlated assets class of commodities to a typical portfolio make metals an appropriate addition for many investors. And getting this exposure with the added benefit of no risk to the deposited principal1 is an added benefit of the MarketSafe® Power MetalsSM CD. This newest MarketSafe CD has exposure to three important metals: the precious metals of gold and silver, and the industrial metal, copper.2

As is apparent on the accompanying chart (Figure #1), investors in gold and silver have been forced to “enjoy” a bit of a roller coaster ride over the past several years. Prices of these metals ran up during the financial crisis as investors sought out safe havens.


Source: EverBank Research Team, based on analysis of publicly available data from Bloomberg. Metal value trends are based on institutional or spot pricing, are illustrative only, and do not reflect retail transaction costs or prices.

Quantitative Easing (QE) programs and the dramatic drop in interest rates, which accompanied these programs, made investments in precious metals even more attractive as prices continued to surge higher through the end of 2012. But, talk of an end to the QE policies here in the U.S. and the possibility of higher interest rates helped reverse these gains as prices of both gold and silver fell over the past two years. We have seen a bit of a pause in this price volatility this year, with both gold and silver trading in a fairly tight range – perhaps building a base from which the next move will occur.

There are many factors that could lead to a rebound in the price of precious metals, including: central bank purchases (China in particular), the emergence of a middle class in the emerging markets, a possible spike in inflation rates brought on by the massive amounts of liquidity pumped into the markets via QE, and finally, an increase in geo-political tensions that could send investors back to these traditional safe haven assets.

Chuck Butler and other contributors to the Daily Pfennig® newsletter have discussed these many factors at length in past editions, so I won’t go into further detail on these today. Feel free to utilize the archives available on the Daily Pfennig® website if you want to review these in more detail.

I want to use the experience of investors in the recently matured Diversified Metals MarketSafe CD to make a quick point about the averaging involved in our MarketSafe CDs, and additional information on this calculation can be found in the MarketSafe® Power MetalsSM CD term sheet. Diversified Metals was a 5-year CD originally issued back in May 2010 and, as you can see in the above chart, both gold and silver moved higher for the first few years, but actually fell during the remaining years and ended up fairly close to the price levels of the original issue date. If a client had purchased and held these metals during the 5-year term of the MarketSafe CD, their returns would have been much less than those received by the investors in the Diversified Metals MarketSafe CD. In this case, the averaging worked to the benefit of the depositors.

Again, past performance is no guarantee of future returns,2 but the example of Diversified Metals shows the potential benefit of using averaging. So, these depositors were able to book a gain on their MarketSafe Diversified Metals CDs and still get back into the metals at price levels similar to where they were 5 years ago. Our latest offering has a 45% annual and overall cap on the performance of the metals,3 so if you believe the metals will appreciate much more than that during the next 5 years, maybe a direct purchase of the metals through one of our Metals Select products would be more appropriate for you (but remember the Metals Select products are not FDIC insured and carry the risk of principal loss).4

Why Add Copper To The Mix?
As discussed in the May 17th Sunday Daily Pfennig® newsletter, copper has many uses in today’s economy. Demand for what Chuck calls the “utility infielder” of metals should grow as the global economy starts heating up. I don’t need to rehash all of the reasons pointed out in last month’s Daily Pfennig® newsletter, but I did want to highlight one that I believe deserves another mention: electrical transmission. More than half of the copper produced is used for electrical transmission and construction purposes.5 A steady source of electricity is very important in allowing emerging economies to reach their full potential. That is why two of the fastest growing economies – China and India – have set out on huge infrastructure projects in order to upgrade and improve their electrical transmission grids.6

And with the emergence of a middle class in these emerging economies, electrical transmission to individual homes will become even more widespread. McKinsey Global Institute estimates that “by 2025, more than half of the world’s population will have joined the consuming classes, driving annual consumption in emerging markets to $30 trillion.”7 McKinsey goes on to say that the rise of the middle class in emerging markets will have an economic force that’s perhaps 1,000 times bigger than the Industrial Revolution in the 18th century. A new Industrial Revolution in the emerging markets should lead to increased demand for this utility infielder of metals.

Details Of Our Newest MarketSafe Offering
Like all MarketSafe CDs, our new Power Metals CD is an indexed, U.S. dollar-denominated deposit product. This CD, which offers 100% deposited principal protection,1 is a limited time opportunity that brings you access to the upside potential of gold, silver, and copper with a maximum payout of 45%.2 It will have a 5-year term, and will use an annual average pricing model that some of our previous MarketSafe CDs have employed.

The initial price of gold, silver and copper at the issuance of the CD will be compared to the price of these metals on 5 annual pricing dates. The percentage change of each of these prices, subject to a 45% cap at each annual pricing date, will be averaged at the end of the 5-year term; and the potential upside payment of the CD will be based on the equally weighted value of the averages of the performance of these three metals. Please note that this CD does not pay a periodic rate of interest or annual percentage yield.

As with all MarketSafe CDs, should the overall performance be negative, you’ll get your principal back: this is 100% principal protection.1 All the disclosures, the Terms & Conditions, and anything pertinent to this CD can be found here, or we can send them to you if requested.

I am truly excited about being able to finally make available a metals-related MarketSafe CD. From listening to some of the conversations on the desk over the past few days, I know this is something many of you have been waiting for, so don’t miss this opportunity! As I discussed earlier, it took a combination of factors to align in order for us to be able to offer this product to you, and we can’t predict just how long this window of opportunity will remain. Open and fund your CD by July 9th to secure your spot in this innovative way to participate in the metals markets with no risk to your principal deposit.1 You can find more information and/or apply by clicking here.

Before I hit the send button, I want to give a big thank you to all of our partners within EverBank who worked on a very tight schedule in order to allow us to present this opportunity to you. As I mentioned earlier, we have been working hard to try and create a structure that would work, and once we found it, we had to act extremely fast in order to put it all together. It would not have been possible without the hard work, cooperation and dedication of our partners in several different departments. The teamwork displayed during this process makes me proud to be a part of EverBank!

Until my next opportunity to share my thoughts with you in the Daily Pfennig® edition…

Chris Gaffney, CFA
EverBank World Markets, a division of EverBank