text
stringlengths 6
768k
|
|---|
this annual report from time to time as “London Good Delivery Bars.” The unit of trade in London is the troy ounce, |
whose gram conversion is: 1,000 grams equals 32.1507465 troy ounces and 1 troy ounce equals 31.1034768 grams. A London Good Delivery |
Bar is acceptable for delivery in settlement of a transaction on the OTC market. Typically referred to as 400-ounce bars, a London |
Good Delivery Bar must contain between 350 and 430 fine troy ounces of gold, with a minimum fineness (or purity) of 995 parts per |
1,000 (99.5%), be of good appearance and be easy to handle and stack. The fine gold content of a gold bar is calculated by multiplying |
the gross weight of the bar (expressed in units of 0.025 troy ounces) by the fineness of the bar. A London Good Delivery Bar must |
also bear the stamp of one of the refiners who are on the LBMA approved list. Unless otherwise specified, the gold spot price always |
refers to that of a London Good Delivery Bar. Business is generally conducted over the phone and through electronic dealing systems. On March 20, 2015, ICE Benchmark Administration (“IBA”) |
began administering the operation of an “equilibrium auction,” which is an electronic, tradable and auditable, over-the-counter |
auction market with the ability to settle trades in US Dollars (“USD”), Euros or British Pounds for LBMA-authorized |
participating gold bullion banks or market makers (“gold participants”) that establishes a reference gold price for |
that day’s trading. IBA’s equilibrium auction is the gold valuation replacement selected by the LBMA for the London |
gold fix previously determined by the London Gold Market Fixing Ltd. that was discontinued on March 19, 2015. IBA’s equilibrium |
auction, like the previous gold fixing process, establishes and publishes fixed prices for troy ounces of gold twice each London |
trading day during fixing sessions beginning at 10:30 a.m. London time (the “LBMA AM Gold Price”) and 3:00 p.m. London |
time (the “LBMA PM Gold Price”). Daily during London trading hours the LBMA AM Gold Price and |
the LBMA PM Gold Price each provide reference gold prices for that day’s trading. Many long-term contracts will be priced |
on either the basis of the LBMA AM Gold Price or the LBMA PM Gold Price, and market participants will usually refer to one or the |
other of these prices when looking for a basis for valuations. The LBMA AM Gold Price and the LBMA PM Gold Price, determined according |
to the methodologies of IBA and disseminated electronically by IBA to selected major market data vendors, such as Refinitiv and |
Bloomberg, are widely used benchmarks for daily gold prices and are quoted by various financial information sources as the London |
gold fix was previously. The Trust values its gold on the basis of the LBMA PM Gold Price. 6 The LBMA PM Gold Price is the result of an “equilibrium |
auction” because it establishes a price for a troy ounce of gold that clears the maximum amount of bids and offers for gold |
entered by order-submitting gold participants each day. The opening bid and subsequent bid prices are generated by an algorithm |
based method, and each auction is actively supervised by IBA staff. There are currently 16 direct gold participants (Bank of China, |
Bank of Communications, Citibank N.A. London Branch, Coins ‘N Things, Inc., DRW Investments, LLC, Goldman Sachs, HSBC Bank |
USA NA, Industrial and Commercial Bank of China (ICBC), StoneX Financial Ltd., Jane Street Global Trading, LLC, JPMorgan Chase |
Bank, N.A. London Branch, Koch Supply and Trading LP, Marex, Morgan Stanley, Standard Chartered Bank and Toronto-Dominion Bank), |
and IBA uses ICE’s front-end system, WebICE, as the technology platform that allows direct participants as well as sponsored |
clients to manage their orders in the auction in real time via their own screens. The IBA auction process begins with a notice of an auction |
round issued to gold participants before the commencement of the auction round stating a gold price in U.S. Dollars, at which |
the auction round will be conducted. An auction round lasts 30 seconds. Gold participants electronically place bid and offer orders |
at the round’s stated price and indicate whether the orders are for their own account or for the account of clients. Aggregate |
bid and offer volume will be shown live on WebICE, providing a level playing field for all participants. At the end of the auction round, the IBA system evaluates the |
equilibrium of the bid and offer orders submitted. If bid and offer orders indicate an imbalance outside of acceptable tolerances |
established for the IBA system (normally 10,000 oz) (e.g., too many purchase orders submitted compared to sell orders or vice versa), |
the auction chairman calculates a new auction round price principally based on the volume weighting of bid and offer orders submitted |
in the immediately completed auction round. For instance, if the order imbalance indicates that purchase orders (bids) outweigh |
sales orders (offers) then a new auction round price will be issued that will be increased over that used in the prior auction |
round. Likewise, the new auction round price will be decreased from the prior round’s price if offers outweigh bids. To clear |
the imbalance, the IBA system then issues another notice of auction round to gold participants at the newly calculated price. During |
this next 30 second auction round, gold participants again submit orders, and after it ends, the IBA system evaluates for order |
imbalances. If order imbalances persist, a new auction price is calculated and a further auction round will occur. This auction |
round process continues until an equilibrium within specified tolerances is determined to exist. Once the IBA system determines |
that orders are in equilibrium within system tolerances, the auction process ends and the equilibrium auction round price becomes |
the LBMA PM Gold Price. The LBMA PM Gold Price and all bid and offer order information |
for all auction rounds become publicly available electronically via IBA instantly after the conclusion of the equilibrium auction. |
Since April 1, 2015, the LBMA Gold Price has been regulated by the Financial Conduct Authority (“FCA”) in the |
United Kingdom (“UK”). IBA also has an Oversight Committee, made up of market participants, industry bodies, direct |
participant representatives, infrastructure providers and IBA. The Oversight Committee allows the LBMA to continue to have significant |
involvement in the oversight of the auction process, including, among other matters, changes to the methodology and accreditation |
of direct participants. Additionally, IBA watches over the price discovery process for the LBMA Gold Price and ensures that |
it meets the International Organization of Securities Commission’s (IOSCO) Principles for Financial Benchmarks. The LBMA PM Gold Price is widely viewed as a full and fair representation |
of all or material market interest at the conclusion of the equilibrium auction. IBA’s LBMA PM Gold Price electronic auction |
methodology is similar to the non-electronic process previously used to establish the London gold fix where the London gold fix |
process adjusted the gold price up or down until all the buy and sell orders are matched, at which time the price was declared |
fixed. Nevertheless, the LBMA PM Gold Price has several advantages over the previous London gold fix. The LBMA PM Gold Price auction |
process is fully transparent in real time to the gold participants and, at the close of each equilibrium auction, to the general |
public. 7 The LBMA PM Gold Price auction process is also fully auditable |
by third parties since an audit trail exists from the time of each notice of an auction round. Moreover, the LBMA PM Gold Price’s |
audit trail and active, real time surveillance of the auction process by IBA as well as FCA’s oversight of IBA, deters manipulative |
and abusive conduct in establishing each day’s LBMA PM Gold Price. Since March 20, 2015, the Sponsor determined that the London |
gold fix, which ceased to be published as of March 19, 2015, could no longer serve as a basis for valuing gold bullion received |
upon purchase of the Trust’s Shares, delivered upon redemption of the Trust’s Shares and otherwise held by the Trust |
on a daily basis, and that the LBMA PM Gold Price is an appropriate alternative for determining the value of the Trust’s |
gold each trading day. The Sponsor also determined that the LBMA PM Gold Price fairly represents the commercial value of gold bullion |
held by the Trust and the “Benchmark Price” (as defined in Trust Agreement) as of any day is the LBMA PM Gold Price |
for such day. The Zurich Gold Bullion Market After London, the second principal center for spot or physical |
gold trading is Zurich. For eight hours a day, trading occurs simultaneously in London and Zurich—with Zurich normally opening |
and closing an hour earlier than London. During these hours, Zurich closely rivals London in its influence over the spot price |
because of the importance of the three major Swiss banks—Credit Suisse, Swiss Bank Corporation, and Union Bank of Switzerland |
(UBS)—in the physical gold market. Each of these banks has long maintained its own refinery, often taking physical delivery |
of gold and processing it for other regional markets. The loco Zurich bullion specification is the same as for the London bullion |
market, which allows for gold physically located in Zurich to be quoted loco London and vice versa. Futures Exchanges The most significant gold futures exchanges are the COMEX and the Tokyo Commodity Exchange (“TOCOM”). The COMEX is the |
largest exchange in the world for trading precious metals futures and options and has been trading gold since 1974. The TOCOM has |
been trading gold since 1982. Trading on these exchanges is based on fixed delivery dates and transaction sizes for the futures |
and options contracts traded. Trading costs are negotiable. As a matter of practice, only a small percentage of the futures market |
turnover ever comes to physical delivery of the gold represented by the contracts traded. Both exchanges permit trading on margin. |
Margin trading can add to the speculative risk involved given the potential for margin calls if the price moves against the contract |
holder. The COMEX trades gold futures almost continuously (with one short break in the evening) through its CME Globex electronic |
trading system and clears through its central clearing system. On June 6, 2003, TOCOM adopted a similar clearing system. In each |
case, the exchange acts as a counterparty for each member for clearing purposes. Other Exchanges There are other gold exchange markets, such as the Istanbul |
Gold Exchange (trading gold since 1995), the Shanghai Gold Exchange (trading gold since 2002), the Hong Kong Chinese Gold & |
Silver Exchange Society (trading gold since 1918) and the Singapore Mercantile Exchange (trading gold since 2010). Market Regulation The global gold markets are overseen and regulated by both |
governmental and self-regulatory organizations. In addition, certain trade associations have established rules and protocols for |
market practices and participants. In the United Kingdom, responsibility for the regulation of the financial market participants, |
including the major participating members of the LBMA, falls under the authority of the FCA as provided by the Financial Services |
and Markets Act 2000 (“FSM Act”). Under this act, all UK-based banks, together with other investment firms, are subject |
to a range of requirements, including fitness and properness, capital adequacy, liquidity, and systems and controls. 8 The FCA is responsible for regulating investment products, including |
derivatives, and those who deal in investment products. Regulation of spot, commercial forwards, and deposits of gold not |
covered by the FSM Act is provided for by The London Code of Conduct for Non-Investment Products, which was established by market |
participants in conjunction with the Bank of England. The TOCOM has authority to perform financial and operational |
surveillance on its members’ trading activities, scrutinize positions held by members and large-scale customers, and monitor |
the price movements of futures markets by comparing them with cash and other derivative markets’ prices. To act as a Futures |
Commission Merchant Broker on the TOCOM, a broker must obtain a license from Japan’s Ministry of Economy, Trade and Industry |
(“METI”), the regulatory authority that oversees the operations of the TOCOM. The CFTC |
regulates trading in commodity contracts, such as futures, options and swaps. In addition, under the CEA, the CFTC has jurisdiction to prosecute manipulation and fraud in any commodity (including precious metals) |
traded in interstate commerce as spot as well as deliverable forwards. The CFTC is the exclusive regulator of U.S. commodity exchanges |
and clearing houses. Secondary Market Trading While the Trust’s investment objective is for the Shares |
to reflect the performance of gold bullion, less the expenses of the Trust, the Shares may trade in the secondary market on |