Contango
Contango is the typical structure of precious metals futures markets, where the price for future delivery is higher than the current spot price. This upward-sloping forward curve reflects the "cost of carry" — the cumulative cost of storing, insuring, and financing a physical metal position until the delivery date.
Why Precious Metals Are Usually in Contango
Holding physical gold or silver involves real costs:
- Vault/storage fees: Typically 0.10%–0.50% per year of metal value
- Insurance: 0.10%–0.20% per year
- Financing: The opportunity cost of capital tied up in metal (risk-free interest rate)
These costs are bundled into the cost of carry. In contango: futures price = spot price + cost of carry. This is the expected, arbitrage-free relationship in a functioning market.
Contango and Roll Cost for Futures Investors
Contango has an important implication for futures-based investors: "roll cost." When a futures trader rolls expiring contracts into the next delivery month, they sell the lower-priced near-month contract and buy the higher-priced far-month contract — locking in a loss equal to the spread. Over time, this roll cost erodes returns.
Physical bullion buyers avoid roll cost entirely, since they hold the metal directly. This is one reason long-term precious metals investors often prefer physical ownership over leveraged futures positions.
Contango vs. Backwardation
| Condition | Futures vs. Spot | Signal |
|---|---|---|
| Contango (normal) | Futures > Spot | Normal market; reflects carrying costs |
| Backwardation | Spot > Futures | Rare; strong physical demand or supply stress |
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