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A valuable choice from Gilliat

Gilliat Financial Solutions has created a structured product that is linked to the price of three precious metals for a term of six years and three weeks.

Precious metals kick-out November 2010 aims to make a pre-defined growth payment to investors that equates to 15.5 per cent a year, and return their original capital. It has an early maturity feature, or kick-out, that can be triggered by the performance of gold, silver and platinum from year two.

If the price of each commodity is at or above its value at the start of the term at the end of year two, investors will receive 31 per cent growth plus their original capital. If this kick-out event is not triggered, the investment will continue and will kick out on the same basis in subsequent years. At the end of year three, investors will receive 45.5 per cent plus their capital, 62 per cent plus capital at the end of year four, 77.5 per cent plus capital at the end of year five or 93 per cent in the final year.

The plan also provides 50 per cent soft capital protection. This means that if no kick-out event is triggered, investorswill receive no growth but will get a full capital return provided all three commodities do not fall by more than 50 per cent at any point during the term. If one or more commodities do breach this barrier, capital is potentially at risk. In this situation, the worst-performing precious metal will need to recover to at least its initial value for investors to get a full capital return. Where the commodity fails to recover, investors will lose 1 per cent for every 1 per cent fall in the index from its initial value.

Gilliat’s backtesting of the product for every six-year period between March 16, 1992 and September 29, 2010 shows that the plan would have kicked out in 72.79 per cent of cases, with no six-year cycles where the capital protection barrier was breached and no kick-out occurred.

This plan provides diversity and choice in the UK structured product market, which is dominated by FTSE 100-linked plans. However, the uncertainty of not knowing when or if the plan will kick-out may not suit some investors.

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