When it comes to commodity trading, contango is one of the most hated futures scenarios that exists. 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 [for more news and analysis on contango subscribe to our free newsletter].
Below, we outline three commodities currently exhibiting contango to help keep investors up to date on the current futures environment.
Gold futures are among the most popularly traded in the world, as investors have adopted this precious metal as a speculative instrument. Currently, gold futures are sitting in contango through June of 2018, as far as contracts are currently offered. With all of the talks of another round of QE and money printing from other central banks around the world, the market has priced in a healthy appreciation for this yellow metal. It should also be noted that investors view this commodity as a safe haven so it may also be that its prices are slated to rise based on a current lack of confidence in markets [see also Three Reasons Why Gold Is Overvalued].
Another one of the most popular commodities, natural gas futures traded more than 8.5 million times on the NYMEX last month. After a punishing four year run, NG futures were able to soar nearly 70% in the last few months, as the commodity finally has some momentum behind it. Save a few months where prices remain relatively the same, natural gas is exhibiting contango through February of 2014 giving investors roughly 18 months to make a play. Take a look at the ETF GASZ, as its unique strategy typically profits from contango.
The other precious metal, silver is often overshadowed by the likes of gold despite being a more useful metal in the industrial world. Investors have until December of 2013 to decide how to play this metal, as that is when it exits its contango phase. Note that silver is far more volatile than gold and many all star analysts, like Jim Rogers, are predicting that the metal is set to experience strong gains in the coming years [see also 25 Ways To Invest In Silver].
Disclosure: No positions at time of writing.