In the futures world, the word contango is often treated like a four-letter obscenity. But when traders understand that it is simply a natural phenomenon that can be navigated, contango loses its negative connotation. Contango is defined as 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. It has been known to burn investors who are not aware of its presence, but staying one step ahead of the futures curve can lead to smarter, more efficient trades [for more commodity news and analysis subscribe to our free newsletter].
Below, we outline three commodities that are currently exhibiting contango to keep traders in-the-know about the world of hard assets:
- Natural Gas: NG typically exhibits contango, as storing the fossil fuel can be quite costly. But what is most surprising is that the asset has been able to maintain this futures curve despite a skyrocketing supply of natural gas in the world. Currently, NG is cyclically moving higher through December 2021, meaning it will have a period of contraction, but the overall trend is pushing prices higher for the next decade. One of the most popular ways to make a play on this commodity is through the United States Natural Gas Fund (UNG), which offers exposure to front-month futures.
- Silver: Precious metals have taken a big hit in 2013, with silver being one of the most impacted. This white metal is in a peculiar position – while it is considered a precious metal, it also holds a number of industrial uses, so the metal can often be treated as both. Though the U.S. economy is recovering, the industrial momentum has yet to bring silver higher, as precious metals’ weakness seems to have infected prices. Silver is sitting in contango through the December 2015 contract. Investors’ fund of choice for silver allocation is the iShares Silver Trust (SLV), which holds more than $7 billion in assets [see also 25 Ways To Invest In Silver].
- Wheat: Representing the agricultural side of the equation, wheat futures are currently contangoed through May of 2015. Last year’s drought plagued agricultural commodities and this year’s weather does not seem to be doing wheat any favors. The planting season has been difficult due to storms and heavy rains, delaying the work of a number of farmers. If wheat output takes a dip this year, look for prices to rise to offset the deficit in the market. The Wheat ETF (WEAT) is one of the most popular ways for investors to add exposure to this commodity.
Disclosure: No positions at time of writing.