Anything to divert gold demand from physical to paper


New Exchange-Traded Notes
Aim to Double, Short Gold

By John Spence
Thursday, February 28, 2008

BOSTON -- A trio of exchange-traded notes listed Thursday are designed to provide leveraged and short exposure to gold-futures prices, but their approach should end up making a notoriously volatile market even more risky for individual investors.

Meanwhile, actively managed exchange-traded funds this week moved yet another step closer to reality.

Deutsche Bank, which already manages several ETNs, listed the new gold offerings on the NYSE Arca. They are DB Gold Double Short ETN, DB Gold Double Long ETN, and DB Gold Short ETN.

"The ETNs will be the first to offer investors short or leveraged exposure to gold," Deutsche Bank said.

ETNs are debt securities that have similarities to exchange-traded funds, or ETFs.

... Doubling Down on Gold

The "double short" ETN would offer investors twice the monthly inverse, or opposite, performance of a gold-futures index, plus the return of a benchmark of U.S. Treasury bills. So if gold lost 1% for the month, the ETN's gold exposure would aim to deliver a positive 2% return.

The "double long" note is designed to give two times the monthly return of gold, while the "short" ETN provides investors the monthly inverse performance of gold, plus the bond collateral return.

Deutsche Bank also issues the "Elements" ETNs, and the German bank has several commodity-themed ETFs that are co-branded with PowerShares Capital Management, a unit of Invesco Ltd.

These include PowerShares DB Commodity Index Tracking Fund and PowerShares DB Energy Fund.

Lehman Brothers recently introduced its first ETNs, which are designed to track commodities and the global private-equity market. More banks are entering the ETN business after the success of their ETF cousins.

Deutsche Bank's new ETNs "allow investors a simple way to take a leveraged or short view on the price of gold," said Kevin Rich, managing director in the bank's global markets investment products group.

There are several ETFs designed to track gold prices and miner shares, including StreetTracks Gold Shares, Market Vectors Gold Miners ETF, iShares Comex Gold Trust, and PowerShares DB Gold Fund.

The most popular of these, StreetTracks Gold Shares, has gained about 45% over the past year and now holds more gold than many sovereign nations.

Gold ETFs can be sold short or purchased on margin, but the new Deutsche Bank ETNs are designed to give leveraged or inverse exposure to the metal automatically.

Rich said the new gold ETNs make available to individuals strategies that were previously only accessible to large, sophisticated investors. The new products remove the work of setting up a margin account or locating a borrower for short selling.

The ETNs "avoid the problems of shorting securities and the nuances of margin accounts," Rich said. He also pointed to the asset-gathering success of leveraged and short ETFs for the stock market, managed by ProShares and Rydex Investments. These stock ETFs provide leveraged and short exposure to the daily price movement of market indexes, while the new Deutsche Bank gold ETNs are tied to monthly returns.

If investors are still bullish on gold due to inflation concerns and a plunging U.S. dollar, they can take a position in the leveraged ETN. For those who feel gold has overshot and the dollar has bottomed, the short and leveraged short ETNs could be attractive.

The three new gold-related ETNs all have annual expenses of 0.75%. They were issued with an initial price of $25 a share, and can be created and redeemed daily in large blocks. This should help the shares stay close to the underlying value, so there shouldn't be the premiums and discounts sometimes observed in closed-end funds, Rich said.

Aside from the movement of gold-futures prices, investors also earn Treasury bill returns. Even though some of the ETNs are leveraged, investors can't lose more than their initial investment. Still, if an investor bought the double-short ETN and gold prices took off, the initial investment could be entirely wiped out.

...Active ETFs

Long-anticipated ETFs that are actively managed, rather than following an index, could soon become a reality.

PowerShares said it is the first firm to receive exemptive relief from the Securities and Exchange Commission for actively managed ETFs in registration.
The Invesco division said it plans to launch four funds which will give investors access to active management in an ETF structure.

"PowerShares is proud to be the first ETF provider to be granted SEC exemptive relief to offer actively managed equity and fixed-income ETF portfolios," said Bruce Bond, chief executive of PowerShares, in a statement. "This is an important milestone for the ETF industry."

If the ETFs are finally launched, they would be the first to be marketed as actively managed funds.

There are already scores of ETFs that arguably have elements of active management embedded in their complex, nontraditional tracking benchmarks.

"Unlike conventional ETFs, the funds are not index funds," said the initial prospectus PowerShares filed in November. "Each fund is actively managed and does not seek to replicate the performance of a specified index."

Separately, State Street Global Advisors this week said it has filed an application with the Securities and Exchange Commission for exemptive relief for a family of actively managed, target-date ETFs.

The State Street Corp. division said the ETFs would invest in a diversified sampling of stock and bond ETFs. Target-date retirement funds, which have grown in popularity in recent years, are designed to automatically manage investors' portfolios by scaling down risk as they age.

"Our application for these actively managed ETFs was filed to meet increasing demand among our clients," said Jim Ross, senior managing director, in a statement.

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