Contango
Also: Forward premium, Contango market
Contango describes a market situation in which the futures price of a commodity is above the current spot price.
Contango is a key term in the futures market: it describes the state in which the futures price (forward price) of a commodity — such as gold or silver — is quoted above the current spot price. The further the delivery date lies in the future, the more pronounced the premium generally is. Contango is statistically the more common normal state on the precious metals market and primarily reflects the cost of carry.
Why does contango arise?
The futures price consists of the spot price plus the so-called cost of carry. This includes:
- Financing costs — capital tied up for the purchase of the physical metal incurs interest.
- Storage costs — physical gold or silver must be securely stored and insured.
- Transportation costs — delivery to the agreed delivery location.
- Convenience yield — a negative component: the benefit of having the metal immediately available (e.g. for industrial processing) reduces the forward premium.
Formally:
Futures price = Spot price × e^((r + s) × T)
where r is the risk-free interest rate, s is the storage/insurance cost and T is the time to maturity in years.
Contango vs. backwardation
| Feature | Contango | Backwardation |
|---|---|---|
| Futures price | > Spot price | < Spot price |
| Typical cause | Cost of carry dominates | Tight immediate supply, high demand |
| Frequency (gold) | Normal state | Rare, usually in crisis periods |
| Market signal | Relaxed supply situation | Tight physical demand |
In the gold market, backwardation only rarely occurs — for example when demand for physical delivery suddenly surges or confidence in paper gold declines. Historical price developments show that pronounced backwardation phases have often coincided with strong price movements.
Significance for investors
Anyone investing in precious metals via futures or ETCs should be aware of the contango effect:
- Roll losses: An ETF or ETC that rolls expiring contracts into newer (more expensive) ones always buys at a higher price than it sells. This roll loss reduces returns compared to the pure spot price performance.
- Physical metal is immune: Those who hold physical gold or silver are not subject to any roll loss. The holding costs (storage, insurance) correspond economically to the contango.
- Carry trade: Professional traders can exploit contango by buying physical metal, storing it and simultaneously selling a futures contract at the higher price — provided the premium exceeds the holding costs.
The current seasonality in the gold market can influence how pronounced the contango is in certain months, as seasonal demand fluctuations move spot prices.
Contango at COMEX and LBMA
At the COMEX, gold and silver futures are traded in standardised contracts. The forward curve typically shows a rising structure — a classic contango market. The LBMA Fixing, by contrast, refers to the spot price and is not directly linked to futures prices, but serves as a reference for calculating the forward premium (GOFO — Gold Forward Offered Rate, today replaced by LBMA Gold Forward Rates).
In brief
Contango is the normal state in the precious metals market and means: futures prices are above the current spot rate. For long-term investors holding physical metal, contango has little direct impact — for ETF and ETC investors, however, roll losses can noticeably reduce returns. Tax and return-related assessments vary individually; this text does not constitute investment or tax advice.