When it comes to commodity trading, few words are more serious in an investor’s vocabulary than contango. This phenomenon has been known to burn a hole in positions and cause problems for those who were not amply prepared. By definition, contango is the process whereby near month futures are cheaper than those expiring further into the future, creating an upward sloping curve for future prices over time. The reason behind this is most often attributed to storage costs; storing barrels of oil or bushels of corn isn’t cheap and the costs have to be passed down the line. Below, we outline three commodities currently exhibiting contango to help keep investors up to date on the current futures environment [see also Jim Rogers Says: Buy Commodities Now, Or You’ll Hate Yourself Later].
Copper futures, which are among the most popular in the world, are facing a steep upward slope that refuses to let up until February of 2014. This may imply that markets are assuming a further recovery in the construction and industrial sectors of the world, but that may still be a ways off. Recent news has begun to call into question the growth of emerging nations like China and India (both of whom are major consumers of the metal) so this futures curve could get turned on its head in a hurry.
Gold has long been the world’s favorite metal as it has been used as a store of value and a safe haven for quite some time. But in recent years, gold’s uses have added “speculative instrument” to an already impressive resume. Now, many traders like to utilize gold to make bets on markets as well as action from the Fed and central banks around the world. Currently, gold futures are sitting in contango through June of 2018, as far out as they are offered. It seems that a third round of quantitative easing and historical momentum have figured in a massive appreciation for gold in the coming years, now the only question that is left is whether you buy in to that theory or not. Of course, if contango bothers you, the physically-backed SPDR Gold Trust (GLD) is always a good alternative [for more commodity news subscribe to our free newsletter].
The other precious metal, silver is often overshadowed by the performance and prevalence of gold. In reality, this white metal is a much more practical option than its precious counterpart as silver has a hefty presence in the industrial world and is also considered a safe haven investment; all at a relatively low price tag to boot. Currently, silver is faced with contango all the way through December of 2013, giving investors a year and a half to consider a position. Those too shy to dabble in futures are always welcome to try the iShares Silver Trust (SLV) which tracks physical bullion [see also 25 Ways To Invest In Silver].
Disclosure: No positions at time of writing.