World Gold Trust: Form 10-Q for the period ended Dec 31, 2018

This information should be read in conjunction with the financial statements and notes included in Item 1 of Part I of this Quarterly Report. This Quarterly Report, including the exhibits hereto and the information incorporated by reference herein, contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and such forward-looking statements involve risks and uncertainties. Except for historical information, statements about future gold prices, gold bullion sales, foreign currencies (including the Reference Currencies), foreign currency exchange rates, costs, plans, or objectives are forward-looking statements based on our estimates, beliefs, assumptions and projections. Words such as “could,” “would,” “may,” “expect,” “anticipate,” “target,” “goals,” “project,” “intend,” “plan,” “believe,” “seek,” “outlook,” “estimate,” and “predict,” and variations on such words, and similar expressions that reflect our current views with respect to future events and fund performance, are intended to identify such forward-looking statements. These forward-looking statements are only predictions, subject to risks and uncertainties that are difficult to predict and many of which are outside of our control, and actual results could differ materially from those discussed. Important factors that we believe could affect performance and cause results to differ materially from our expectations are described in the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Annual Report on Form 10-K for the fiscal year ended September 30, 2018, as updated from time to time in the Trust’s Securities and Exchange Commission filings.

Organization and Trust Overview

World Gold Trust (the “Trust”) was organized as a Delaware statutory trust on August 27, 2014 and is governed by the Fourth Amended and Restated Agreement and Declaration of Trust (“Declaration of Trust”) dated as of April 16, 2018, between WGC USA Asset Management Company, LLC (the “Sponsor”) and the Delaware Trust Company (the “Trustee”). The Trust is authorized to issue an unlimited number of shares of beneficial interest (“Shares”). The beneficial interest in the Trust may be divided into one or more series. The Trust has established six separate series. SPDR® Long Dollar Gold Trust (“GLDW”) and SPDR® Gold MiniSharesSM (“GLDM”) are currently the only operational series of the Trust. GLDW commenced operations in the first calendar quarter of 2017. GLDM commenced operations during the second calendar quarter of 2018. The fiscal year-end of the Trust and both GLDW and GLDM (referred to jointly as the “Funds”) is September 30. GLDW and GLDM issue shares of beneficial interest (“Shares”), which represent units of fractional undivided beneficial interest in and ownership of either GLDW or GLDM, respectively. The Trust has had no operations prior to January 27, 2017, other than matters relating to its organization, the registration of the Shares under the Securities Act of 1933, as amended, and the sale and issuance by GLDW on December 19, 2016 to WGC (US) Holdings, Inc., an affiliate of the Sponsor, of 10 GLDW Shares at an aggregate purchase price of $1,000. GLDW’s Shares and GLDM’s Shares began trading on the NYSE Arca on January 30, 2017 and June 26, 2018, respectively. As of February 7, 2019, GLDW and GLDM had 230,000 Shares and 45,900,000 Shares outstanding, respectively.

The Funds issue and redeem Shares from time to time in one or more Creation Units to institutional investors referred to as “Authorized Participants.” A Creation Unit equals a block of 10,000 GLDW Shares or a block of 100,000 GLDM Shares. The creation and redemption of Creation Units is only made in exchange for the delivery to the Funds or the distribution by the Funds of the amount of gold and any cash represented by the Creation Units being created or redeemed, the amount of which is based on the net asset value of the number of Shares included in the Creation Units being created or redeemed. Authorized Participants are the only persons that may place orders to create and redeem Creation Units. As of the date of this quarterly report, Goldman, Sachs & Co., J.P. Morgan Securities LLC, Merrill Lynch Professional Clearing Corp., Morgan Stanley & Co., LLC, UBS Securities LLC and Virtu Financial BD LLC are the Authorized Participants. An updated list of Authorized Participants can be obtained from the Administrator or the Sponsor.

The investment objective of GLDW is to track the performance of the Solactive GLD® Long USD Gold Index (the “Index”), less GLDW’s expenses. The Index seeks to track the daily performance of a long position in physical gold, as represented by the LBMA Gold Price AM, and a short position in a basket of non-U.S. currencies (i.e., a long U.S. dollar (“USD”) exposure versus the basket (“FX Basket”)). The non-U.S. currencies, which are weighted according to the Index, consist of: Euro, Japanese Yen, British Pound Sterling, Canadian Dollar, Swedish Krona and Swiss Franc (each, a “Reference Currency”).

The investment objective of GLDM is for the Shares to reflect the performance of the price of gold bullion, less GLDM’s expenses.

In general, the USD value of an investment in Shares of GLDW is expected to increase when both the price of gold increases and the value of the USD increases against the value of the Reference Currencies comprising the FX Basket (as weighted in the Index). Conversely, the USD value of an investment in Shares, in general, is expected to decrease when the price of gold decreases and the value of the USD decreases against the value of the Reference Currencies comprising the FX Basket (as weighted in the Index). If the price of gold increases and the value of the USD decreases against the value of the Reference Currencies comprising the FX Basket, or vice versa, the net impact of these changes will determine the NAV of GLDW on a daily basis.

Investing in the Shares does not insulate investors from certain risks, including price volatility. The following chart illustrates the movement in the NAV of the GLDW Shares against the Index as well as the corresponding gold price (per 1/10 of an oz. of gold) since the day the Shares first began trading on the NYSE Arca:

NAV& Index v. gold price from January 30, 2017 to December 31, 2018

* Index and gold price data have been normalized based on GLDW NAV price per share on January 30, 2017 for comparison purposes.

Source: Bloomberg, ICE Benchmark Administration, Solactive AG

Gold Delivery Agreement Activity

The Gold Delivery Agreement is an agreement between GLDW and the Gold Delivery Provider pursuant to which gold is delivered to or from GLDW to reflect GLDW’s gains and losses with respect to the Reference Currencies comprising the FX Basket. The amount of gold bullion transferred under the Gold Delivery Agreement (the “Daily Deliverable Amount”) essentially is equivalent to GLDW’s profit or loss as if GLDW had exchanged the Reference Currencies for USDs in an amount equal to GLDW’s holdings of gold bullion on such day. In general, if there is a currency gain (i.e., the value of the USD against the Reference Currencies comprising the FX Basket increases), GLDW will receive gold bullion. In general, if there is a currency loss (i.e., the value of the USD against the Reference Currencies comprising the FX Basket decreases), GLDW will deliver gold bullion. In this manner, the amount of gold bullion held by GLDW will be adjusted to reflect the daily change in the value of Reference Currencies comprising the FX Basket against the USD. For more information about the Gold Delivery Agreement, see Note 2.4 to GLDW’s unaudited financial statements.

From January 30, 2017 (the date GLDW Shares began trading on the NYSE Arca) to December 31, 2018, the Daily Deliverable Amount (gross less the fee paid to the Gold Delivery Provider) under the Gold Delivery Agreement ranged from 252.515 ounces of gold bullion delivered to 248.506 ounces of gold bullion received, having corresponding market values, respectively, of $334,178 and $323,083. Over that same period, GLDW delivered a net amount of 538.524 ounces of gold bullion, having a corresponding market value of $690,199.

Critical Accounting Policy

Valuation of Gold, Definition of NAV

GLDW’s policy is to value the investment in gold bullion at fair value. The Administrator will value the gold held by GLDW on the basis of the price of an ounce of gold as determined by ICE Benchmark Administration Limited (“IBA”), a benchmark administrator, which provides an independently administered auction process, as well as the overall administration and governance for the LBMA Gold Price. The net asset value (“NAV”) of GLDW is the aggregate value of GLDW’s assets, including Gold Delivery Agreement less its liabilities. In determining the NAV of GLDW, the Administrator values the gold held by GLDW on the basis of the price of an ounce of gold determined by the IBA 10:30 AM auction process (“LBMA Gold Price AM”), which is an electronic auction, with the imbalance calculated and the price adjusted in rounds (30 seconds in duration). The auction runs twice daily at 10:30 AM and 3:00 PM London time. The Administrator determines the NAV of GLDW on each day the NYSE Arca is open for regular trading, generally as of 12:00 PM New York time. If no LBMA Gold Price AM is made on a particular evaluation day or if the LBMA Gold Price PM has not been announced by 12:00 PM New York time on a particular evaluation day, the next most recent LBMA Gold Price AM will be used in the determination of the NAV of GLDW, unless the Administrator, in consultation with the Sponsor, determines that such price is inappropriate to use as the basis for such determination.

Once the value of the gold has been determined, the Administrator subtracts all estimated accrued expenses and other liabilities of GLDW from the total value of the gold and all other assets of GLDW. The resulting figure is the NAV of GLDW. The NAV of GLDW is used to compute the Sponsor’s fee and gold delivery provider fee. The Administrator determines the NAV per Share by dividing the NAV of GLDW by the number of GLDW Shares outstanding as of the close of trading on NYSE Arca.

GLDM’s policy is to value the investment in gold bullion at fair value. The NAV of GLDM is the aggregate value of GLDM’s assets less its liabilities (which include estimated accrued but unpaid fees and expenses). The NAV of GLDM is calculated based on the price of gold per ounce times the number of ounces of gold owned by GLDM. For purposes of calculating NAV, the number of ounces of gold owned by GLDM reflects the amount of gold delivered into (or out of) GLDM on a daily basis by Authorized Participants creating and redeeming Shares. Except as otherwise described in GLDM’s prospectus, in determining the NAV of GLDM, the Administrator generally will value the Gold Bullion held by GLDM on the basis of the LBMA Gold Price PM. If no LBMA Gold Price PM is made on a particular evaluation day or if the LBMA Gold Price PM has not been announced by 12:00 p.m. New York time on a particular evaluation day, the next most recent LBMA Gold Price (AM or PM) will be used to determine the NAV of GLDM, unless the Sponsor determines that such price is inappropriate to use as the basis for such determination. If the Sponsor determines that such price is inappropriate to use, it shall identify an alternate basis for evaluation of the Gold Bullion held by GLDM.

The Administrator determines the NAV per Share by dividing the NAV of GLDM, by the number of outstanding GLDM Shares.

Results of Operations

GLDW

GLDW commenced operations on January 27, 2017 and in the period from then to December 31, 2018, 350,000 GLDW Shares (35 Creation Units) were created in exchange for 34,493.9 ounces of gold, 120,000 Shares (12 Creation Units) were redeemed in exchange for 11,210.1 ounces of gold, and 103.3 ounces of gold were sold to pay sponsor fees.

At December 31, 2018, HSBC Bank plc (the “GLDW Custodian”) held 22,729.7 ounces of gold on behalf of GLDW in its vault, 100% of which was allocated gold in the form of London Good Delivery gold bars including 89.4 ounces of gold payable in connection with the settlement of the Gold Delivery Agreement with a market value of $29,131,547 (cost $28,233,429) based on the LBMA Gold Price AM on December 31, 2018. Through the date of this report, (i) 2.2 ounces of gold were receivable by the GLDW Custodian in connection with the settlement of the Gold Delivery Agreement and (ii) GLDW has used no subcustodians.

At September 30, 2018, the GLDW Custodian held 22,004.4 ounces of gold on behalf of GLDW, 100% of which was allocated gold in the form of London Good Delivery gold bars with a market value of $26,042,261 (cost $27,378,794). Subcustodians did not hold any gold in their vaults on behalf of GLDW.

On September 12, 2018, Inspectorate International Limited concluded the annual full count of GLDW’s gold bullion held by the GLDW Custodian. On October 1, 2018, Inspectorate International Limited concluded reconciliation procedures from September 12, 2018 through September 30, 2018. The results can be found on www.spdrgoldshares.com (http://www.spdrgoldshares.com).

GLDM

GLDM commenced operations on June 26, 2018 and in the period from then to December 31, 2018, 31,000,000 GLDM Shares were created (310 Creation Units) in exchange for 309,858.7 ounces of gold and 106.8 ounces of gold were sold to pay sponsor fees.

At December 31, 2018, ICBC Standard Bank Plc (the “GLDM Custodian”) held 290,769.3 ounces of gold on behalf of GLDM in its vault, 100% of which was allocated gold in the form of London Good Delivery gold bars including gold payable, if any, with a market value of $372,664,432 (cost $356,375,416) based on the LBMA Gold Price AM on December 31, 2018. Through the date of this report, (i) 18,982.6 ounces of gold were receivable by the GLDM Custodian in connection with the creation of Shares and (ii) GLDM has used no subcustodians.

At September 30, 2018, the GLDM Custodian held 185,927 ounces of gold in its vault, 100% of which was allocated gold in the form of London Good Delivery gold bars with a market value of $220,741,876 (cost $226,957,150). Subcustodians did not hold any gold in their vaults on behalf of GLDM.

On September 13, 2018, Inspectorate International Limited concluded the annual full count of GLDM’s gold bullion held by the GLDM Custodian. On October 1, 2018, Inspectorate International Limited concluded reconciliation procedures from September 13, 2018 through September 30, 2018. The results can be found on www.spdrgoldshares.com (http://www.spdrgoldshares.com).

Cash Resources and Liquidity

At December 31, 2018, neither GLDW nor GLDM had any cash balances. When selling gold to pay expenses, the Administrator endeavors to sell the smallest amount of gold needed to pay expenses in order to minimize the Funds’ holdings of assets other than gold. As a consequence, we expect that the Funds will not record any net cash flow from their operations and that their cash balance will be zero at the end of each reporting period.

Analysis of Movements in the Price of Gold

As movements in the price of gold are expected to directly affect the price of the Funds’ Shares, it is important to understand and follow movements in the price of gold. Past movements in the gold price are not indicators of future movements.

The following chart shows movements in the price of gold based on the LBMA Gold Price AM in U.S. dollars per ounce over the period from January 30, 2017 (the first day Shares of GLDW began trading on the NYSE Arca) to December 31, 2018.

Daily gold price – January 30, 2017 to December 31, 2018

LBMA Gold Price AM USD

The following chart shows movements in the price of gold based on the LBMA Gold Price PM in U.S. dollars per ounce beginning June 26, 2018 (first day Shares of GLDM began trading on the NYSE Arca) through December 31, 2018.

Daily gold price – June 26, 2018 to December 31, 2018

LBMA Gold Price PM USD

The average, high, low and end-of-period gold prices for the periods from January 30, 2017 through December 31, 2018, based on the LBMA Gold Price AM were:

(1) The end of period gold price is the LBMA Gold Price AM on the last business day of the period. This is in accordance with the Declaration of Trust and the basis used for calculating the NAV of GLDW.

The average, high, low and end-of-period gold prices for the period from April 1, 2018 (first quarter of GLDM’s trading) through December 31, 2018, based on the LBMA Gold Price PM were:

(1) The end of period gold price is the LBMA Gold Price PM on the last business day of the period. This is in

accordance with the Declaration of Trust and the basis used for calculating the NAV of GLDM.

(2) There was no LBMA Gold Price PM on the last business day of December 2018. The LBMA Gold Price AM on the last business day of December 2018 was $1,281.65. The Net Asset Value of the Trust on December 31, 2018 was calculated using the LBMA Gold Price AM, in accordance with the Trust Indenture.

The Funds are both passive investment vehicles. Neither is actively managed. GLDW is designed to track the Index during periods in which the Index is flat or declining as well as when the Index is rising. Accordingly, fluctuations in the value of gold bullion and/or the value of USD relative to the Reference Currencies will affect the value of the Shares of GLDW. GLDM is designed for its Shares to reflect the performance of the price of Gold Bullion, less GLDM’s expenses. Fluctuations in the value of gold bullion will affect the value of the Shares of GLDM.

Disclosure Controls and Procedures

The duly authorized officers of the Sponsor, performing functions equivalent to those a principal executive officer and principal financial officer of the Trust would perform if the Trust had any officers, have evaluated the effectiveness of the Trust’s and the Funds’ disclosure controls and procedures, and have concluded that the disclosure controls and procedures of the Trust and the Funds were effective as of the end of the period covered by this report. Such disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in the reports that the Trust files or submits under the Securities Exchange Act of 1934, as amended, are recorded, processed, summarized and reported, within the time period specified in the applicable rules and forms, and that such information is accumulated and communicated to the duly authorized officers of the Sponsor performing functions equivalent to those a principal executive officer and principal financial officer of the Trust would perform if the Trust had any officers, and to the Audit Committee of the Sponsor, as appropriate, to allow timely decisions regarding required disclosure.

Internal Control over Financial Reporting

There has been no change in the internal control over financial reporting of the Trust or the Funds that occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Trust’s or Funds’ internal control over financial reporting.

You should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended September 30, 2018.

The risks described above and in our Annual Report on Form 10-K are not the only risks that the Trust faces. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

There have been no material changes in our risk factors from those disclosed in our 2018 Annual Report on Form 10-K, except for the following:

The sale of the Funds’ Gold Bullion to pay expenses at a time of low gold prices could adversely affect the value of the Shares.

The Sponsor will sell Gold Bullion held by the Funds’ to pay the Funds’ respective expenses on an as-needed basis irrespective of then-current gold prices. The Funds are not actively managed and no attempt will be made to buy or sell Gold Bullion to protect against or to take advantage of fluctuations in the price of gold. Consequently, the Funds’ Gold Bullion may be sold at a time when the gold price is low, resulting in a negative effect on the value of the Shares.