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 central term of the futures market: it describes the state in which the futures price (forward price) of a commodity — such as gold or silver — quotes higher than the current spot price. The further the maturity date lies in the future, the more pronounced the premium is as a rule. Contango is the statistically more frequent normal state in the precious-metals market and reflects above all the holding costs (cost of carry).
Why does contango arise?
The futures price is made up of the spot price plus the so-called cost of carry. This includes:
- Financing costs — capital tied up in the purchase of the physical metal costs interest.
- Storage costs — physical gold or silver must be securely stored and insured.
- Transport costs — delivery to the agreed forward 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 denotes the risk-free interest rate, s the storage/insurance costs and T the term 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, mostly in times of crisis |
| Market signal | relaxed supply situation | tense physical demand |
In the gold market, backwardation occurs only rarely — for example, when demand for physical delivery suddenly rises sharply or confidence in paper gold falls. Historical price trends show that pronounced backwardation phases often coincided with strong price movements.
Significance for investors
Anyone investing in precious metals via futures or ETCs should know the contango effect:
- Roll losses: an ETF or ETC that rolls expiring contracts into newer (more expensive) contracts always buys more expensively than it sells. This roll loss reduces the return compared with the pure spot price trend.
- Physical metal is immune: anyone holding physical gold or silver is not subject to any roll loss. The holding costs (storage, insurance) correspond economically precisely 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 strongly contango is pronounced in certain months, since seasonal demand fluctuations move spot prices.
Contango at COMEX and LBMA
At COMEX, gold and silver futures are traded in standardised contracts. The futures curve (forward curve) usually shows a rising structure — a classic contango market. The LBMA fixing, by contrast, relates 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 the LBMA Gold Forward Rates).
In brief
Contango is the normal case in the precious-metals market and means: futures prices are above the current spot rate. For long-term investors who hold physical metal, contango has hardly any direct effect — for ETF and ETC investors, however, the roll losses can noticeably reduce the return. Tax and return-related assessments are individually different; this text does not constitute investment or tax advice.