UBS, Morgan Stanley link bullish products to gold; commodity gaining from broad worries, adviser says

By Kenneth Lim

Boston, Feb. 23 - Issuers offered bullish gold-linked products amid concerns about the state of the U.S. economy.

UBS AG plans to price 12% to 13.25% yield optimization notes with contingent protection due Feb. 28, 2011 linked to the Market Vectors Gold Miners exchange-traded fund.

Interest is payable quarterly, with the exact rate to be set at pricing. Payout at maturity will be par unless the fund shares fall by 35% or more during the life of the notes, in which case investors will receive one share per note.

Morgan Stanley is offering zero-coupon buffered Performance Leveraged Upside Securities due March 31, 2011 linked to the price of gold.

At maturity, investors will receive par plus 1.4 times any gain in the price of gold, subject to a maximum total payout of 170% to 175% of the principal. The exact cap will be set at pricing.

If gold prices decline by no more than 15%, investors will receive par. Investors will lose 1% for every 1% that gold declines beyond 15%.

The price of gold will be determined by the afternoon gold fixing price per troy ounce of gold for delivery in London.

Gold seen as safe haven

Gold prices have gotten a boost from investors looking for safe havens amid the turmoil in the equity markets, an investment adviser said.

"Gold typically does well when equities are distressed because people see gold as a hedge against weakness in the economy and the U.S. dollar," the adviser said. "Right now it's people looking for a safe place to park their money that's driving prices up. Stocks are bleeding, bonds don't offer enough yield, gold is the one that's been going up and up."

There is some concern that the current gold prices may be propped up by speculation, the adviser noted.

"Whenever an asset class has as strong of a run as gold has had, it's natural to wonder whether it's fundamentally justified or are we looking at a speculative bubble?" the adviser said. "I think the general feeling in this case is that there's a bit of both, that you're likely to see corrections but the problems in the other markets continue to funnel capital into this particular asset class."

Structured alternatives work

Investors who are bullish about the price of gold will likely find structured products attractive, the adviser said.

"I think one of the strongest cases for structured products has been in asset classes like commodities, where the issuer really opens up access to assets that would otherwise just be too difficult for many investors to invest in," the adviser said.

The leverage that products like Morgan Stanley's offering can provide can also appeal to investors.

"The structured product allows you to be very specific about your strategy so that you can seek out the best return given your particular view of the market and your risk tolerance," the adviser said. "Like this Morgan Stanley note, if it matches my view of the market, I can get 140% participation on the upside and a 15% buffer on the downside. If it matches my view, what's not to like?"

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