Deutsche ties buffered barrier rebate notes to gold; notes could draw moderate bulls: adviser

By Kenneth Lim

Boston, April 13 - Deutsche Bank AG's planned buffered barrier rebate securities linked to the price of gold offers investors an opportunity to take part in moderate gains in the commodity, an investment adviser said.

Deutsche Bank, through its London branch, plans to price zero-coupon buffered barrier rebate securities due Nov. 1, 2010 linked to gold.

If the price of gold goes above 135% of its initial level during the life of the notes, investors will receive 114% to 124% of the principal. The exact rebate amount will be set at pricing.

If the upper barrier has not been breached, at maturity investors will receive par plus any gain in the price of gold. Investors will receive par if the price of gold is flat or declines by no more than 15%. Investors will lose 1% for every 1% that gold declines beyond 15%.

Taking a shine on gold

The product could be attractive for investors who are slightly bullish about the price of gold, the adviser said.

"It's very clearly an upside focused product," the adviser said. "You don't make any money at all if gold is flat or falls, but you make some money as long as gold improves."

The ideal outcome for investors is if the price of gold falls within its starting level and the upper barrier, the adviser said.

"Your best upside participation is one, and that's only from zero to 35%," the adviser said. "Beyond that you're underperforming the asset. If it's lower than zero, it's either zero return after 18 months or a loss. So the investor is expecting gold to end up between zero and 35% after 18 months."

Tweaking participation

The product essentially adjusts the participation rate on the upside in exchange for some downside protection, the adviser said.

"It's like your participation rate on the upside falls further and further the higher it goes above 35%, but what you get in exchange is that 15% buffer on the downside," the adviser said. "You fall further and further behind the underlying asset after it goes past 35%, which is obviously not ideal but it's not a complete loss because you still get that 14%-24% rebate.

"That's quite a big range so it's a little hard to say how acceptable it is, but even on the low end, 14% after 18 months isn't a complete wash."

Investors will have to decide whether that protection is worth the cost, the adviser said.

"It's all hypothetical, but if you don't have any buffer, maybe you can get a little over 100% participation up to 35%?" the adviser suggested. "Because if you're confident enough about gold you might want something better than just one-to-one on the upside. But obviously if you're not that confident you might see the value of this buffer, which doesn't make you any money but could potentially save you from losing some money."

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