Gold Plunge: Investors Could Lose Big on Structured Notes
Gold Value Plunge Means Investors Stand to Lose Big on $1.1 Billion Worth of Structured Notes
The price of gold plunged 9.1% on Monday – the steepest decline in 33 years – after having dropped 5% just three days earlier. This could mean big losses for the countless gold investors who purchased more than a billion dollars worth of gold-linked structured notes over the past three years.
Industry experts are calling this week’s plunge in price a kind of “flash crash,” but no one really knows whether or not the price of gold will rebound. If it doesn’t, a lot of investors are going to lose significant amounts of money in investments they believed were a sure bet.
Of the $1.28 billion worth of gold-linked notes that are still outstanding, a large portion promised some type of protection against loss. Like everything with structured products, however, any guarantees of “principal protection” are highly complex.
In the case of the gold-tied notes, many promised protection against losses only up to a certain percent. The one-year, gold-tied notes sold by Barclays Plc (BARC) in Sept. 2012, for example, only offered protection up to 15%. Citigroup’s two-year, gold-linked notes, also sold in Sept. 2012, only offered 10% protection against losses.
Many investors, however, were likely unaware of these caps.
This is because the broker-dealers who sell structured products often either gloss over the products’ risks or choose to focus exclusively on the products’ benefits. For example, onebroker-dealer explains the structured notes like this:
“A Structured Note combines two elements: A bond (that protects your principal) makes up most of the investment (typically 80%), and the rest of your money is put into a derivative. Because the investment bond element in Structured Notes can be designed to give a return that equals your initial investment (as long as you keep the product until maturity), your principal will be protected. And the derivative element offers you the potential to achieve higher returns when compared with a standard deposit.”
Clearly, this isn’t always the case.
If you have suffered losses due to a gold-linked structured note purchased from a brokerage firm in the last few years, please contact one of our securities arbitration attorneys today for a free case evaluation.
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