Contango in gold trading
Contango is when gold futures trade above spot and later months above nearer ones, reflecting interest and storage costs; it is gold's normal state.
Also called Forward premium, Positive carry curve
Contango describes a futures curve that slopes upward: each later delivery month is priced higher than the one before, and the nearest month is above spot. For gold, which is cheap to store and earns nothing, the curve is almost always in contango, and the size of the spread between months closely tracks the US dollar interest rate for that period. Holding gold costs the interest forgone plus a little storage; the futures price includes exactly that.
How it applies to gold trading
Contango is the futures equivalent of swap. A trader long GC for six months does not pay a nightly charge, but buys at a price that already includes the financing; as expiry approaches, the futures price converges toward spot, and that convergence is the cost. As a hypothetical, with spot at $4,000 and six-month futures at $4,090, the $90 contango is roughly 4.5% annualized, in line with short-term dollar rates. A trader who rolls positions forward pays the spread between months each time.
When dollar interest rates rise, contango widens and the cost of holding long gold positions, in futures or via swap on spot, rises with it. That is one channel through which higher rates weigh on gold.
A common mistake
Comparing a December futures price with today’s spot and reading the gap as a “forecast” that gold will rise. Contango is a cost of carry, not a prediction.
See also: Backwardation, Basis, Roll, Swap and rollover.
Frequently asked questions
Why is gold usually in contango?
Because holding gold means forgoing interest on the money and paying storage, and the futures price includes those costs. With positive dollar rates, later delivery is worth more than earlier.
Does contango cost me money on gold futures?
Over time, yes: the futures price converges toward spot as expiry nears, and rolling to the next month means paying the spread. It is the same financing cost that spot traders pay as swap.