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What Return?

This is the time of the year when performance statistics are published in the blogoshpere. One of the parameters reported is the arithmetic 1-year return for stocks, commodities, currencies, funds, etc. But what return? The details of the calculations are usually left out. Here is an example of five different gold return calculations that vary up to 90%.

In a post yesterday in The Reformed Broker blog, a chart of commodities returns was posted that was prepared by Bespoke IG. I notice that the return for gold as of December 26, 2012 was stated as 6.37%. I am sure that the Bespoke people know very well what they are doing and that was the correct return for their purposes. But no details were included how they came up with it. Below is a table of gold returns based on 4 different alternative sources of data plus the Bespoke return:

Source Price at Start of year Price on 12/26/2012 Return
Bespoke 6.37%
Netdania Charts1 1,564.14 1,662.13 6.26%
Futures2 1,571.0 1,659.8 5.65%
London 3:00 PM fixing3 1,598 1,651 3.32%
GLD4 154.76 160.78 3.89%

1.  Open price on 01/01/2012 – Close price on 12/26/2012
2.  Open price on 01/03/2012 – Close price on 12/26/2012
3.  Last price on 12/21/2012 because of the holiday
4.  Open price on 01/03/2012 – Close price on 12/26/2012

It may be seen that the variation between the London 3:00 PM fixing and the Bespoke results is close to 90%. The London 3:00 PM fixing and GLD results are close and so are the Bespoke and Netdania Charts results.

The lesson is that the return depends on what market is used to make the transactions and it is specific to a buy and closing price. Other than for securities that trade in a single exchange, it is very difficult to come up with exact return figures and results may vary widely based on investment vehicles used. In this specific example about gold, someone who invested $10,000,000 in GLD made close to $389,000 of profit but someone who purchased spot gold through a reputable forex broker with 1:1 leverage probably made about $626,000. The difference is significant.

What return? Only the one reported by a broker’s back office usually makes sense. Those published in the blogsphere may or may not apply to specific situations. They may not even be good for comparing the performance of various assets. Needless to say they may be useless for specific portfolio allocation calculations. 

Disclosure: no relevant position at the time of this post and no plans to initiate any positions within the next 72 hours.

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