Commodity returns differ from stock or bond returns because physical commodities generate no income on their own. Your total return comes entirely from price appreciation, and you must subtract any carrying costs such as storage, insurance, and financing to determine your true net return. This makes the cost structure a critical factor in evaluating commodity investments.

The gross return is simply: (Current Price - Purchase Price) / Purchase Price. The net return subtracts total storage costs from the gross profit before dividing by the purchase price. Annualized returns are calculated using the compound annual growth rate (Compound Annual Growth Rate (CAGR)) formula: ((Ending Value / Beginning Value) ^ (1/years)) - 1, which gives you the equivalent annual rate of return over your holding period.

The cost ratio measures total storage costs as a percentage of your purchase price, helping you understand how much of your return is consumed by carrying costs. For example, if you bought gold at $1,800 and paid $360 in total storage over two years, your cost ratio is 20%. If the gold appreciated to $2,350, your gross return is 30.56% but your net return after storage drops to 10.56%. This analysis is essential for comparing physical commodity investments with alternatives like commodity ETFs or futures that have different cost structures.