Morgan Stanley launches bullish gold note; asset class in demand as economic concerns rise, advisor says

By Kenneth Lim

Boston, Sept. 28 - Morgan Stanley launched a series of bullish products linked to the price of gold on Monday as the value of the precious metal shot up.

"It's quite timely, isn't it?" an investment advisor said.

Morgan Stanley plans to price zero-coupon trigger securities due October 2009 linked to the SPDR Gold Trust.

The Gold Trust is an investment trust that holds gold, and is designed to reflect the price of gold bullion.

At maturity, if shares of the underlying trust finishes above their initial level, the notes will pay par plus the trust return, subject to a return cap of 36% to 38%.

If the final share price is less than or equal to its initial value and the trust has not decreased to or below the trigger level of 65% of the initial share price during the life of the notes, investors will receive par. If the final share price is less than or equal to its initial value and the trust has decreased to or below the trigger level during the life of the notes, investors will lose 1% for every 1% that the trust finishes below its initial level.

The return cap will be set at pricing.

Product could ride gold fever

Investors have been buying gold over the past two weeks as concerns mounted about the health of the U.S. economy, the investment advisor said.

"Gold is a negative correlation kind of asset," the advisor said. "It's often seen as a safe haven for when the U.S. dollar weakens or the U.S. economy is in trouble. If you look at the charts, it's quite an effective hedge against those two scenarios."

Investors had been hoping that a proposed $700 billion economic bailout package would be approved in Congress, but the market's concerns remained high after the House rejected the plan on Monday, the advisor said.

"There are two concerns, I think," the advisor said. "First, that whatever plan is eventually approved, if there's one, won't work, but I think that's kind of like the background level of concern that's going to be there no matter what.

"The other point is, people worry that if Congress can't find a way to approve this now, that it might take them too long. The longer they take to come to any decision, the longer the markets will suffer and maybe the harder it will be for any plan to work."

"If you're pessimistic, then gold could look like a good investment at this time," the advisor said. "The only concern would be, if a rescue package is approved, would it fall back down?"

Product offers access

The Morgan Stanley product offers a way for investors an easy way to gain exposure to gold, the advisor said.

"That's one of the more appealing aspects of structured products in general," the advisor said. "It allows the investor to gain exposure to asset classes like gold and commodities and foreign currency in a fairly convenient way. People could lose interest in those S&P 500 accelerated growth notes or reverse convertibles, but I think they really fill the niche here."

The Morgan Stanley note would be preferable to a direct investment in the trust for investors who are moderately bullish on the price of gold, the advisor said.

"As long as you don't think gold is going to exceed 36% to 38%, this makes sense, because you also get that 35% barrier on the downside," the advisor said. "If gold goes up by more than 36% to 38%, you'll be underperforming the underlying, although you'd still get 30-something percent over one year."

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