How does the trust make money for investors, and does it generate income?

The trust generates no ordinary income such as dividends or interest. Returns come only from changes in the price of the gold it holds. The trust sells small amounts of gold to pay the sponsor's fee and expenses, which can produce realized gains or losses, but the trust does not seek profit from gold price movements.

Why did the trust report a net loss in 2007 despite gold rising about 31%?

The 2007 net loss of $507,145 reflects $4.28 million in sponsor fees, which exceeded the $3.77 million in total gains from gold sales and redemptions. Unrealized gains on gold held are not included in reported net income, because the gold is carried at lower of cost or market for accounting purposes, so the rise in gold prices shows up in NAV rather than in the income statement.

What happens to my investment over time because of the sponsor fee?

Because the trust sells gold to pay its 0.40% annual sponsor fee, each share represents slightly less gold over time. Gold prices must rise enough to offset this gradual reduction for the share price to keep pace with gold. The fee is charged daily and paid monthly, and the filing notes the NAV per share trailed gold's percentage gain slightly in 2007 for this reason.

How can investors buy or sell IAU, and what determines its trading price?

Individual investors buy and sell IAU through brokerage accounts on the AMEX. Only Authorized Participants, registered broker-dealers with agreements with the sponsor and trustee, can create or redeem shares, and only in Baskets of 50,000 shares. Trading prices reflect NAV plus market supply and demand, and shares may trade at a premium or discount, particularly when the major gold markets are closed.

What protections do I lack compared with a mutual fund or commodity pool?

The trust is not registered as an investment company, so Investment Company Act protections such as limits on affiliate transactions and restrictions on suspending redemptions do not apply. The trust is also not a commodity pool under the Commodity Exchange Act, so investors do not receive commodity pool disclosure documents. Redemptions may be suspended during market closures or emergencies, and shareholders have no voting rights or rights to dividends.

IAU 10-K FY2007 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed February 27, 2008. Cited figures are marked; the original filing is the authoritative source.

The iShares COMEX Gold Trust (AMEX: IAU) 10-K for fiscal year 2007 shows a passive, grantor trust that holds physical gold bullion and issues shares representing fractional undivided interests in that gold.

Net assets rose from $907.7 million at December 31, 2006 to $1,481.3 million^a at December 31, 2007, a 63.2% increase, driven mainly by share creation (3.8 million shares created, 250,000 redeemed) rather than investment performance. Shares outstanding grew from 14.4 million to 17.95 million. The COMEX spot settlement price rose 31.4% during the year, from $635.20 to $834.90 per ounce, and NAV per share rose 30.9% to $82.52.

The trust reported a net loss of $507,145^b for 2007, compared with net income of $2.35 million in 2006. The loss reflects $4.28 million in sponsor fees (0.40% of average assets) that exceeded realized gains on gold sales and redemptions. Because the trust has no income, it must sell gold to pay the sponsor's fee, so the gold backing each share shrinks over time unless gold prices rise enough to offset it.

Investors should note that gold is carried at lower of cost or market for accounting, while the redeemable shares are reported at NAV, which creates a large equity deficit of $(477.6) million on the balance sheet. The filing also highlights structural risks: concentration in a single commodity, the trust's passive nature, potential liquidity constraints tied to Authorized Participants, and the possibility of trading at a discount or premium to NAV.

For investors, the filing is primarily a disclosure of a strong gold-price year with a modest accounting loss from fees. The key considerations are that returns track gold closely, costs are low at 0.40%^c annually, and the trust carries no protections typical of registered investment companies or commodity pools.

02—Key points

Key Highlights

Net assets grew 63.2% to $1.48 billion at year-end 2007, up from $907.7 million, mostly due to net creation of 3.55 million shares.
NAV per share rose 30.9% to $82.52, closely tracking the 31.4% rise in the COMEX spot gold settlement price to $834.90 per ounce.
The trust reported a 2007 net loss of $507,145 versus net income of $2.35 million in 2006, as sponsor fees of $4.28 million outweighed gains on gold.
Sponsor fee is 0.40% annually of net asset value, with the sponsor assuming most other administrative and marketing expenses (legal fees capped at $100,000 per year).
Holdings are approximately 1,774.8 ounces of gold at year-end 2007, carried at $1.00 billion (lower of cost or market) versus a fair value of $1.48 billion.
Shares trade on the AMEX under 'IAU' and can be created or redeemed only in 50,000-share Baskets by Authorized Participants, not by individual investors.
Key risks disclosed include gold price volatility, gradual erosion of gold per share from fee-related sales, the trust's passive structure, and lack of investment company or commodity pool regulatory protections.

03—Questions

Frequently Asked Questions

How does the trust make money for investors, and does it generate income?
The trust generates no ordinary income such as dividends or interest. Returns come only from changes in the price of the gold it holds. The trust sells small amounts of gold to pay the sponsor's fee and expenses, which can produce realized gains or losses, but the trust does not seek profit from gold price movements.
Why did the trust report a net loss in 2007 despite gold rising about 31%?
The 2007 net loss of $507,145 reflects $4.28 million in sponsor fees, which exceeded the $3.77 million in total gains from gold sales and redemptions. Unrealized gains on gold held are not included in reported net income, because the gold is carried at lower of cost or market for accounting purposes, so the rise in gold prices shows up in NAV rather than in the income statement.
What happens to my investment over time because of the sponsor fee?
Because the trust sells gold to pay its 0.40% annual sponsor fee, each share represents slightly less gold over time. Gold prices must rise enough to offset this gradual reduction for the share price to keep pace with gold. The fee is charged daily and paid monthly, and the filing notes the NAV per share trailed gold's percentage gain slightly in 2007 for this reason.
How can investors buy or sell IAU, and what determines its trading price?
Individual investors buy and sell IAU through brokerage accounts on the AMEX. Only Authorized Participants, registered broker-dealers with agreements with the sponsor and trustee, can create or redeem shares, and only in Baskets of 50,000 shares. Trading prices reflect NAV plus market supply and demand, and shares may trade at a premium or discount, particularly when the major gold markets are closed.
What protections do I lack compared with a mutual fund or commodity pool?
The trust is not registered as an investment company, so Investment Company Act protections such as limits on affiliate transactions and restrictions on suspending redemptions do not apply. The trust is also not a commodity pool under the Commodity Exchange Act, so investors do not receive commodity pool disclosure documents. Redemptions may be suspended during market closures or emergencies, and shareholders have no voting rights or rights to dividends.

04—Continue

← View all 10-K filings