UBS to offer one-year participation notes linked to gold with 15% barrier for nervous bulls

By Emma Trincal

New York, March 13 - UBS AG, Jersey Branch's 0% gold participation notes due March 28, 2013 linked to the spot price of gold target investors who still anticipate rising gold prices but want to play the rally safe, sources said.

"If you're cautiously bullish on gold, this trade makes a lot of sense," said Tom Balcom, founder of 1650 Wealth Management.

"You think that gold prices will continue to go higher, but you want to protect yourself if there's a pullback."

The payout at maturity will be par plus any percentage increase in the price of gold, subject to a maximum return of at least 16.5%, according to an FWP filing with the Securities and Exchange Commission. The exact maximum return will be set at pricing.

Investors will receive par if the price of gold falls by up to 15% and will be exposed to losses from the initial price if it falls by more than 15%.

Reasonably priced

"For a bullish investor, if you're wrong, at least you have the 15% protection, which is pretty good," Balcom said.

"The terms, including the cap, are fairly attractive, and that's probably due to the surge in volatility in gold.

"I've seen more commodity-linked notes lately, and I expect that we'll see more gold notes.

"You couldn't get that type of cap with another asset class, such as U.S. large cap for instance. The volatility wouldn't be there."

Since August 2011 when the price of gold peaked at $1,900, volatility in gold has been on the rise. The price fell to $1,550 by the end of December before reaching $1,767 at the end of February. Since then, it has declined by more than 5% to $1,665 on Tuesday.

"This note looks reasonably priced," a market participant said. "They give you a decent cap. The barrier on the downside is aggressively priced.

"If instead of a barrier they had put a hard buffer on the downside, you would have received half of the cap, even less, perhaps a third of it - in any case, less than 8%."

Short-term bulls

Despite the correction, gold bulls continue to anticipate further appreciation in the precious metal. The question is whether it will happen within a year from now.

"This is for a short-term bullish view, and I think there are reasons to be bullish on gold short term," said Ferenc Sanderson, chief operative officer of Cranwood Capital Management LLC.

"In Europe, they're putting a band-aid on a hemorrhaging patient. In the U.S., we're not out of the woods yet. The economy is not exactly bouncing back to 2008. It's a bear rally. People buy gold when there is fear, and fear is still justified.

"It's an election year. The Fed still has its fingers on the QE3 bazooka. They will come back without a doubt. In the meantime, food prices are going up, health-care prices are going up. There is already inflation in the system."

Sanderson said the notes could be easily replicated with options. Another solution would be to buy the SPDR Gold Trust exchange-traded fund, which trades on the NYSE Arca under the ticker symbol "GLD."

"The GLD would bring more liquidity and probably at a lower cost. But if you want to protect yourself against a correction, this product makes sense," he said.

Long-term bulls

Greg Werlinich, president of Werlinich Asset Management, LLC, said he is bullish on gold long term but not for the near future. In his view, neither the 15% downside threshold nor the 16.5% upside are strikes likely to be hit within a year.

As a result, investors may be better off being long the asset class directly via the ETF.

"Gold is likely to stay in that range. Gold has already gone down 200 points from $1,900 to $1,700; it's not going down another 200 points. The likelihood of a 15% drop is minimal in my view," Werlinich said.

"On the upside, a 16.5% rise is more likely than a 15% decline. But I don't think either of them is likely. So I'm not sure what would be the benefits of investing in that versus the ETF.

"In the long term, I'm a big believer that the price of gold will continue to rise. But in the short term, it will require an event, whether a war or a large default by a sovereign nation that is unexpected, and I just don't see it at this point."

The notes would probably be of little use to someone who already has exposure to gold, he said, unless the purpose of investing in the product would be to hedge the existing long position.

"More likely, you could use it as a conservative way to take a position in gold. If you're worried about the downside risk, that would be a way to do it," he said.

The notes (Cusip: 90261JJG9) are expected to price Friday and settle March 21.

JPMorgan Chase Bank, NA, J.P. Morgan Securities LLC and UBS Investment Bank are the underwriters.

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