Contango
Also: Forward premium, Contango market
Contango describes a market situation in which the futures price of a commodity is higher than 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 — trades higher than the current spot price. The further the delivery date lies in the future, the stronger the premium tends to be. In the precious metals market, contango is statistically the more common normal state and reflects above all the carrying costs (cost of carry).
Why does contango arise?
The forward price is composed 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.
- 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:
Forward 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 |
|---|---|---|
| Forward price | > spot price | < spot price |
| Typical cause | Cost of carry dominates | Scarce immediate supply, high demand |
| Frequency (gold) | Normal state | Rare, mostly in times of crisis |
| Market signal | Relaxed supply situation | Strained 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 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 understand the contango effect:
- Roll losses: an ETF or ETC that rolls expiring contracts into newer (more expensive) contracts always buys at a higher price than it sells. This roll loss reduces the return compared with pure spot price development.
- Physical metal is immune: anyone holding physical gold or silver is not subject to roll losses. The carrying costs (storage, insurance) economically correspond exactly to the contango.
- Carry trade: professional traders can exploit contango by buying physical metal, storing it and simultaneously selling a forward contract at the higher price — provided the premium exceeds the carrying 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 on COMEX and LBMA
On the COMEX, gold and silver futures are traded in standardised contracts. The forward curve usually shows an upward-sloping structure — a classic contango market. The LBMA fixing, by contrast, refers to the spot price and is not directly linked to forward 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 case in the precious metals market and means: forward prices lie above the current spot rate. For long-term-oriented investors holding physical metal, contango has hardly any direct effect — but for ETF and ETC investors, roll losses can noticeably reduce the return. Tax and return-related assessments differ individually; this text does not constitute investment or tax advice.