01—Abstract
Summary
Summary of the 10-K filed March 1, 2007. Cited figures are marked; the original filing is the authoritative source.
This 10-K covers the fiscal year ended December 31, 2006 for the iShares COMEX Gold Trust (AMEX: IAU), a passive grantor trust that holds physical gold bullion and issues shares representing fractional undivided interests in that gold.
Net assets grew 146% during 2006, from $368.3 million to $907.7 milliona, as shares outstanding rose from 7.15 million to 14.4 million. The increase was driven mainly by a 22.8% rise in the COMEX spot settlement price (from $517.10 to $635.20 per ounce), with net asset value per share up 22.3% to $63.03. Net income was $2.35 million, or $0.19 per share, reflecting realized gains on gold distributed for redemptions and sales to cover expenses, offset by sponsor fees of $3.05 million (0.40% annual rate).
Because the trust has no income stream, it must sell gold to pay its sponsor fee, so each share's gold content steadily declines unless gold prices rise enough to offset it. The filing also marks a change of sponsor: effective February 26, 2007, Barclays Global Investors International Inc. replaced Barclays Global Investors, N.A. The Bank of New York serves as trustee and The Bank of Nova Scotia as custodian.
Management concluded that disclosure controls and internal control over financial reporting were effective, and PricewaterhouseCoopers issued an unqualified opinion. The risk factors are extensive and emphasize that the shares track gold prices with no hedging or active management, that shares can trade at a premium or discount to NAV, and that investors lack the protections of the Investment Company Act and the Commodity Exchange Act.
For investors, the key takeaways are that IAU provides direct, low-cost gold exposure with a 0.40%b annual fee and an exchange-traded structure, but returns depend entirely on gold prices, and the steady gold sales to pay fees create a structural drag. Trading-hour mismatches with the gold markets can also produce premiums or discounts to NAV.
02—Key points
Key Highlights
- Net assets rose 146.42% to $907.7 million at December 31, 2006, with shares outstanding doubling to 14.4 million.
- The COMEX spot settlement price rose 22.84% in 2006 to $635.20, and NAV per share rose 22.34% to $63.03, closely tracking gold.
- Net income was $2.35 million ($0.19 per share), driven by $4.9 million of gains on gold distributed for redemptions, offset by $3.05 million in sponsor fees.
- The sponsor fee is 0.40% annually of adjusted NAV, and the sponsor covers most other trust expenses, with legal fees capped at $100,000 per year.
- Sponsorship transferred to Barclays Global Investors International Inc. effective February 26, 2007; The Bank of New York is trustee and The Bank of Nova Scotia is custodian.
- The trust is passive and unhedged, and gold must be sold to pay fees, so each share's gold content declines over time absent price appreciation.
- Internal controls were assessed as effective, with an unqualified PricewaterhouseCoopers audit opinion; the trust is treated as a grantor trust for tax purposes.
03—Questions
Frequently Asked Questions
How does the iShares COMEX Gold Trust generate income for investors?
The trust has no ordinary income. It earns returns only through changes in the price of the gold it holds. Gains and losses are realized when gold is sold to pay the sponsor fee or distributed for share redemptions, and these flow through to shareholders as a grantor trust.
What fees do investors pay?
The sponsor fee is 0.40% per year of the trust's adjusted net asset value, accrued daily and paid monthly in arrears. The sponsor pays most other administrative and marketing expenses, including trustee and custodian fees, listing and registration fees, and audit costs, up to $100,000 per year in legal fees. Redeeming or depositing gold also requires a $2,000 trustee fee per transaction.
Why might IAU shares trade at a premium or discount to NAV?
Shares trade on the AMEX until 4:15 p.m. New York time, while gold markets such as London, Zurich and COMEX close earlier, reducing gold market liquidity later in the day. This can widen trading spreads and cause shares to trade above or below NAV. The creation and redemption of baskets through authorized participants is intended to limit these gaps through arbitrage, but that mechanism can fail if creation or redemption is disrupted.
What are the main risks to an investment in IAU?
The main risk is a decline in gold prices, since the shares fully track gold without hedging. Gold sales to cover fees steadily reduce the gold per share, so gold must rise to avoid losses. Other risks include suspension of redemptions during market closures or emergencies, the possibility of termination by holders of 75% of shares, uncertain liquidity, and the trust's lack of Investment Company Act and Commodity Exchange Act protections.
Are investors protected by securities regulations?
No. The trust is not registered under the Investment Company Act of 1940 and is not a commodity pool under the Commodity Exchange Act, so shareholders lack the regulatory protections that apply to those vehicles. Shareholders also do not have the voting, director election, or dividend rights of corporate shareholders.
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