01—Abstract
Summary
Summary of the 10-K filed February 25, 2011. Cited figures are marked; the original filing is the authoritative source.
iShares Gold Trust (IAU), a passive grantor trust sponsored by BlackRock and listed on NYSE Arca, ended 2010 with net assets of $5.32 billiona, up 90.4% from $2.79 billion at year-end 2009.
Growth came from both a 28.3% rise in the London PM Fix gold price and a 49% increase in outstanding Shares, from 260.0 million to 386.95 million. Net asset value per Share rose 27.9% to $13.74b. Net income was $32.3 million, or $0.11 per Share, and consisted of realized gains on gold distributed for redemptions and gold sold to pay expenses, offset by $11.1 million in Sponsor's fees.
The trust's economics are structurally simple but carry a built-in drag. The Sponsor fee accrues at 0.25%c annually (reduced from 0.40% effective July 1, 2010), and the trust has no income, so it must sell gold to pay that fee. Each Share therefore represents a slowly shrinking quantity of gold, and investors only break even if gold prices rise enough to offset that erosion.
Management also notes that the trust does not hedge, does not actively manage, and that Shares can trade at premiums or discounts to NAV, particularly outside the hours when major gold markets are open. Operational changes during the year were significant. The custodian moved from The Bank of Nova Scotia to JPMorgan Chase Bank, N.A.
(London branch) effective September 1, 2010, and the trust was renamed from iShares COMEX Gold Trust on September 2, 2010. Gold valuation shifted from the COMEX spot settlement price to the London PM Fix effective December 9, 2010.
The Shares also underwent a ten-for-one split in June 2010. Management concluded that internal controls were effective, and PricewaterhouseCoopers issued an unqualified opinion on both the financial statements and internal control.
02—Key points
Key Highlights
- Net assets reached $5.32 billion at December 31, 2010, up 90.4% year over year from $2.79 billion, driven by both gold price appreciation and net share creation.
- Outstanding Shares rose 49% to 386.95 million, reflecting 138.95 million Shares created and 12.0 million redeemed during 2010.
- NAV per Share increased 27.9% to $13.74, closely tracking the 28.3% rise in the London PM Fix to $1,405.50 per ounce.
- Net income was $32.3 million ($0.11 per Share), comprising $39.7 million of gains on gold distributed for redemptions and $3.7 million on gold sold for expenses, less $11.1 million in Sponsor's fees.
- The Sponsor's fee was reduced from 0.40% to 0.25% of adjusted NAV effective July 1, 2010, lowering the annual cost drag on holders.
- The trust holds no income-generating assets, so it must continually sell gold to pay fees, steadily reducing the gold backing each Share absent gold price gains.
- Gold valuation moved from the COMEX spot settlement price to the London PM Fix on December 9, 2010, and the custodian changed to JPMorgan on September 1, 2010.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2010filed February 25, 2011Financial Statements
FY2010 against FY2009
| Line item | FY2010FY2009 | Change |
|---|---|---|
| Operating Expenses | $11.11M$9.10M | +22.2% |
| Net Income | $32.30M$60.97M | −47.0% |
| EPS (Basic) | $0.22— | — |
| Shares Outstanding (Basic) | 147.80M— | — |
05—Questions
Frequently Asked Questions
What does one share of IAU represent?
Each Share is a fractional undivided beneficial interest in the trust's net assets, which consist primarily of gold held by the custodian. Shares are created and redeemed only in Baskets of 50,000 Shares, through Authorized Participants, in exchange for gold. At December 31, 2010, NAV per Share was $13.74, and the Basket Gold Amount was 489.368 fine ounces as of the June 2010 split, adjusted daily for fee-related gold sales.
How do fees reduce the value of my investment?
The Sponsor's fee accrues daily at 0.25% annually of adjusted NAV and is paid by selling gold. Because the trust has no other income, each Share holds slightly less gold over time. Investors need gold prices to rise by at least the fee drag to break even. In 2010 the Sponsor's fee totaled $11.1 million, or about 0.31% of average net assets.
Can individual investors create or redeem Shares directly?
No. Only registered broker-dealers that are Authorized Participants may create or redeem Shares, and only in 50,000-Share Baskets. Retail investors buy and sell Shares on NYSE Arca. Because of this structure, market prices can deviate from NAV, with premiums or discounts widening when gold markets are closed, especially after London, Zurich and COMEX trading ends.
What are the main risks to the trust's value?
The main risks are a decline in gold prices, the steady erosion of gold per Share from fees and expenses, the custodian's limited liability for losses (such as those from terrorism or natural disasters), and the possibility that inferior-quality gold deposited by Authorized Participants could reduce NAV. The trust is passive and uses no hedging, and Holders of 75% of Shares can vote to terminate the trust, which would trigger gold sales and possible losses.
Is the trust taxed as a stock or as a collectible?
The trust is treated as a grantor trust for U.S. federal income tax purposes, so holders are taxed as if they directly owned a pro rata share of the gold. Because gold is a collectible, long-term gains for individuals are generally taxed at a maximum 28% rate rather than the 15% rate for most other long-term capital gains. Investors should consult their own tax advisors on their specific circumstances.
06—Continue