NEW MARKET EMERGES IN WARRANTS FOR GOLD A new market has emerged in warrants to buy gold, a vehicle which bankers say brings some of the play of commodity options into the field of securities. Over the past three weeks, Swiss offices of American banks have launched a total of four issues of warrants with varying conditions, drawing on renewed inflationary worries and the recovery of the gold price last year. And Credit Suisse and Credit Suisse-First Boston each issued Swiss franc bonds with warrants for gold which have a similar character, though they are aimed at a less professional market. The market is still small. Taken together, the four American-led warrant issues raised only about 50 mln Swiss francs. But banks believe the vehicle meets a need of investors and predicted a lively future. Andrew Barrett of Citicorp Investment Bank (Switzerland) AG said: "The warrants give smaller investors a chance to have a long-term investment in gold with limited risk." Citicorp in Zurich launched the first of these warrants on February 27, following it up with a second issue less than a week later. The issuer in both cases was Citibank NA. The idea found some quick copies. Goldman Sachs in Zurich organized and co-led an issue for the Swiss branch of Banque Indosuez on March 9 and last night Morgan Guaranty (Switzerland) AG did another for Morgan Guaranty Trust Co of New York. The four issues now offer investors striking prices for gold ranging from the Indosuez issue at 410 dlrs an ounce, the same price as the underlying commodity, to a 430 dlr level on the first one for Citibank. The premiums range from 22 pct to 36 pct and maturities from 18 months to four years and three months, in all cases longer than gold futures and options on U.S. Markets. The bankers traced the inspiration for the market back to the February report of U.S. Consumer prices for January, when a jump of 0.7 pct raised again the threat of inflation. "Many people are worried about inflation again," said Mats Joensson of Goldman Sachs. "Money supply in Germany and the United States has grown very strongly in the last year and people want to take a ride on gold." The gold market, having seen strong gains in 1986, has languished just above 400 dlrs an ounce over the past few weeks. But the banks saw in warrants the vehicle for a more highly leveraged play where the downside risk was limited. Barrett said it was natural that the market developed in Switzerland. "People here understand gold, and they understand warrants," he said. Citicorp (Switzerland) pioneered warrants with a series of equity-linked covered issues based on Japanese company shares over the past two years, and last autumn, Swiss banks launched covered warrants in Swiss registered shares in a bid to give foreign investors a chance to play in a market otherwise closed to all but Swiss citizens, and to play it with higher leverage. But after a quick flurry of issues, that market dried up when Swiss shares prices fell from their January peaks. The issues are being marketed not on the basis of simple premiums, but on implicit volatility models devised to provide scientific comparisons between titles in the options market. Martin Bachem of Morgan Guaranty said his bank's issue was competitive despite its relatively high premium. The issue, for five ounces at 425 dlrs, was priced at 955 Swiss francs, making a premium over the spot gold price of nearly 36 pct. Using a Black Sholes options model, he said the issue's long, 4.3-year maturity meant the warrants needed an implicit volatility of gold of only 24.5 pct for the option to pay off, which he claimed was lower than the other issues. But Barrett said the Black Sholes variant Citicorp used pointed to a higher volatily for the Morgan issue and emphasized that the models were at best an inexact science. And each bank, using its own model, put the implicit volatility needed for its own issue at close to 25 pct. Whatever the calculation, the issues have received a warm welcome from investors. Joensson of Goldman Sachs said there was a lot of demand, even among small investors, who were buying 15 or 20 warrants apiece. "The most sophisticated ones wouldn't buy these because the premiums are too high," he said.