There is no income at all - no coupon, no dividend, no rent. The return is the price change minus the cost of carry, which means a flat price is a loss, and the loss compounds.
10 min read · Level 3
I think the carry is the most underrated number in this asset class, and the reason is that it is charged in a form nobody experiences as a payment. A vault fee is deducted, a product fee is taken from the units, and a futures roll is embedded in a price - none of them arrive as a bill, so none of them register as a decision. Meanwhile the same investor will happily spend an afternoon arguing about whether a commodity is cheap, which is the part nobody can know. The asymmetry is almost comic: enormous attention on an unknowable price, and none at all on a knowable subtraction that is certain to occur every year regardless of who is right. Where I would push back on the conventional framing is on the phrase "it pays no income, so it is not really an investment". That argument proves too much - a currency pays no income either, and so does a house you live in, and nobody concludes those are pointless to hold. The absence of income is not a defect; it is a description of what the asset does, which is exist. The honest correction is narrower and more useful: because there is no income and there is a cost, the entire case rests on the price, and the price is the one thing about which nobody has a reliable method. Anybody holding this class should be able to say what job it is doing that justifies paying to hold it, and if the answer turns out to be "I expect it to go up", that is a forecast rather than a job.
Every other income-producing class in this curriculum pays you something for holding it, and that payment funds the cost of holding it. A building's rent covers its insurance. A bond's coupon arrives whatever the price does. A share's dividend is declared out of profits.
A commodity pays nothing. There is no coupon, no dividend, no rent and no earnings, because the asset is a physical good rather than a claim on anybody's activity. And unlike a digital asset, which also pays nothing, this one has to be stored, insured and kept safe, so the running cost is not zero either - it is negative.
Return = the change in the price, minus the cost of carry
That is the entire formula, and the second term is the one that makes this class unlike anything else here.
Take three holdings over ten years in which nothing at all happens to any price, with income reinvested where there is income:
A bond at a 4.0% coupon 1.04^10 = +48.02% A share at a 2.5% dividend 1.025^10 = +28.01% Metal M at 0.65% of carry 0.9935^10 = -6.3131%
Same decade, no price movement anywhere, and a spread of 54 percentage points between the first row and the third. Nothing went wrong in the third row. Storage was paid, insurance was paid, and the metal is exactly where it was.
The consequence is a break-even that nobody quotes:
Over ten years at 0.65% of carry, the price must rise 1 / 0.9935^10 - 1 = 6.7385% simply for the holding to be worth what it cost
And with inflation, the picture is harder again. A flat nominal price over ten years, with 2.5% inflation and 0.65% of carry:
0.9935^10 / 1.025^10 - 1 = -26.8120% of purchasing power
A real holding, in a real vault, that lost more than a quarter of what it could buy without the price moving by a single unit.
Now a case where the price does move. Metal M bought at 2,000 and sold five years later at 2,300, with 0.65% of carry throughout:
Gross price change 2,300 / 2,000 - 1 = +15.00% After carry 1.15 x 0.9935^5 - 1 = +11.3108% Carry took 3.6892 percentage points
The gain was real and the carry was 24.6% of it.
Because the absence of income changes what the holder can survive, and the presence of carry changes what the holder needs the price to do - and these two work in the same direction.
Start with what arrives while you wait. A bond holder whose bond has fallen 35% still collects coupons on stated dates: over five years at 4.0%, reinvested, that is 21.665% arriving regardless of the price. A share holder collects dividends. A property owner collects rent, and the tenant's obligation has nothing to do with what the building would fetch.
A commodity holder in a 35% decline collects nothing, and pays the vault. There is no schedule, no date on which anything is due, and no partial compensation for being early. That is a materially harder position to hold, and it is the reason positions in non-income assets are abandoned during declines more often than the arithmetic alone predicts.
Then the direction of the carry. Income assets have a tailwind: a flat price is a positive return. This class has a headwind: a flat price is a negative return, and the headwind compounds, which is why 0.65% a year became -6.3131% over a decade rather than -6.5%.
Put those together and the hurdle is specific rather than vague. To be worth holding at all, the price has to rise by more than the carry. To be worth holding in preference to a bond, it has to rise by more than the carry plus what the bond would have paid - which over the ten years above is 6.7385% plus 48.02%. That is not an argument against holding it; it is the size of the case that has to be made, and it is a case about the price and only about the price.
Which is exactly why the reasons people give for holding this class are almost never about the return. They are about what the asset is: a physical good, not a promise, whose price responds to physical supply and demand rather than to corporate earnings or a contract. Those are real arguments and lesson six is where they are tested. What they cannot be is arguments about income, because there is none, and any presentation of this class that implies a yield has either introduced a derivative or is describing something else.
One honest qualification. The carry is not fixed at 0.65% - it is whatever the route costs. A listed product at 0.40% has a smaller headwind than vaulted physical metal, and a futures position has no storage charge at all because the cost of carry is embedded in the price of the contract instead. It is present in every route; only its form and its size change, and lesson three is where the futures version of it becomes visible.
Educational, not personalised financial advice. Nothing in the Investor Academy is a recommendation to buy, sell or hold anything — what is right for you depends on your own circumstances and the rules where you live.
Two holders, ten years, one commodity, and the same correct view about the price.
Both believe Metal M will be higher in a decade. Both are right: it goes from 2,000 to 2,600, a rise of 30.00%.
Holder one used vaulted physical metal at 0.65% a year, bought at a 4.0% premium and sold at a 2.0% discount.
Price effect 1.30 Carry 0.9935^10 = 0.936869 Dealer premium and discount 0.98 / 1.04 = 0.942308 ------------------------------------------------------- Outcome on the outlay 1.30 x 0.936869 x 0.942308 = 1.147664
A gain of 14.7664% over ten years, on a price that rose 30.00%.
Holder two used a listed product at 0.40% a year with a 0.05% spread each way.
Price effect 1.30 Fee 0.996^10 = 0.960712 Spread both ways 0.9995 x 0.9995 = 0.999000 ------------------------------------------------------- Outcome 1.30 x 0.960712 x 0.999000 = 1.247677
A gain of 24.7677% over ten years, on the same 30.00% price move.
The gap between the two is 10.00 percentage points of outcome from an identical view held over an identical period. Neither holder was wrong about anything. The difference is entirely the cost of the route, and holder one paid it for a specific property - metal they hold, that owes nothing to anybody - which lesson one described and which holder two does not have.
Now the part that puts the whole lesson in one figure. Take holder two's better outcome, 24.7677% over ten years, and set it against 3.0% inflation over the same decade:
1.247677 / 1.03^10 - 1 = -7.1611% in purchasing power
A correct view, the cheaper route, a price that rose 30.00%, and the holding bought 7.1611% less at the end than at the beginning. That is not an argument that this class should not be held. It is the reason the case for holding it has to be made on something other than the expected return, and it is the honest starting point for lesson six.
Reading a flat price as a flat outcome. At 0.65% of carry a decade of no price movement is -6.3131%, and the loss compounds. This is the only class in the curriculum where doing nothing has a running price.
Comparing a commodity's price chart with an equity index's price chart. The equity chart excludes dividends and the commodity chart excludes nothing, because there is nothing to exclude - and the commodity chart also excludes the carry that was paid. The two lines are not measuring comparable quantities in either direction.
Ignoring the route because the view is about the price. The same 30.00% price rise produced 14.7664% through vaulted physical metal and 24.7677% through a listed product over ten years. A ten point difference in outcome from an identical view is a larger effect than most people's disagreement about the price.
Expecting income because the holding is large. There is none, at any size, in any route. A product quoting a yield on a commodity holding is generating it from something else - lending the metal, or writing contracts against it - and that is a separate activity with its own risks.
Forgetting that carry is present in the futures route too. There is no storage invoice because the cost of carry is built into the price of the contract instead, which is lesson three and is where it does the most damage.
Two terms, and the second is never zero. For a five-year hold from 2,000 to 2,300 at 0.65% of carry, the gross 15.00% becomes 11.3108% - the carry took 3.6892 points, which is 24.6% of the gain. Doing this before buying is what stops a price forecast being mistaken for a return forecast.
One divided by one minus the annual carry, compounded over your intended holding period. At 0.65% over ten years that is 6.7385% just to be worth what it cost. That figure is the hurdle the price has to clear before the position has done anything at all.
Run the same price move through each: 30.00% over ten years gave 14.7664% through vaulted physical metal with dealer spreads and 24.7677% through a listed product at 0.40%. The gap is 10.00 percentage points and it is knowable in advance, unlike the price.
The answer is nothing, and you are paying the vault. A bond in the same decline delivers 21.665% over five years at a 4.0% coupon while you wait. Decide the holding period you could genuinely sustain with nothing arriving, before entering, because it will otherwise be decided during a decline.
Before buying in this class, when comparing it against an income-producing holding, when choosing between the physical and listed routes, and once a year on anything already held, using the charges actually paid.
Do not use the carry arithmetic as an argument that this class should never be held - the case for it was never an income case, and lesson six is where the real one is made. And do not apply a single carry figure across routes; it is whatever your route actually charges.
Long-run commodity price charts are among the most widely reproduced images in investing, and they are almost always shown as a price series. Storage, insurance, dealer spreads and rolling costs appear nowhere on them, because a price series has no way to represent a subtraction the holder pays separately. The same charts are then routinely placed alongside equity index charts, which have their own asymmetry in the opposite direction: an index level excludes dividends, so it understates what a holder received. The result is two lines on one page, one of which overstates what an owner would have had and the other of which understates it, compared as though they were the same measurement. Neither chart is inaccurate. What is inaccurate is the comparison, and it is made constantly.
Never compare a commodity price line with an equity index line. One omits a cost you paid and the other omits an income you received.
Create a free account to read the rest and apply it to your own investing.