Contango Futures
What is the reason for futures price for precious metals such as gold which is in contango not to have a perfectly upward sloping futures curve? For example futures price of gold for delivery is as follows
June 1600
July 1604
Aug 1607
Sept 1605
Oct 1606
Nov 1608
What is the possible reason for the decline in the futures price in September? I understand that futures price are market determined. What I don't understand is the motivation of the traders to allow the September price to be lower than August. Will there be an arbitrage opportunity in this case?
Thanks for your help
Because economics is a lie, obvs.
Yeah. I understand that theory doesn't apply neatly in practice. But there must be some explanation for this. I hope someone can shed light on this. Thank you very much for your help
Seasonality would be my guess... It's less pronounced in gold than in other commodities, for obvious reasons, but it's present nonetheless. And no, it ain't arbitrage.
EDIT: there are also some very particular liquidity effects. As I understand it, there are certain gold months that command a small liquidity premium and some that, conversely, trade with a discount. IIRC, for COMEX futs nobody touches the Sep month and they mostly skip Oct to go directly to Dec. Why that is, I dunno.
Yeah. this makes sense. This may be caused by liquidity premium, or even convenience yield. Seasonality in demand for gold may also be a factor. Thanks
Most likely, your data is wrong. Gold futures are almost always positively sloped across all maturities. The only example I could think where that would not be the case is if there was a complete lack of faith in the capital markets/trading counterparties. That happened around the time of the Lehman bankruptcy for a brief period of time. I think people were worried that gold might not actually be delivered against the futures.
Disclaimer: I don't follow the gold market closely, so I might be wrong.
"Liquidity premium" is a very good way of stating this. Check out the volumes associated with the various months. The bid/ask spread is very wide on these illiquid contracts, which leads to the exchange printing a settlement price that isn't exactly ideal.
http://www.cmegroup.com/trading/metals/precious/gold.html
Thanks Dr. Shakalu. I also observed that not all maturities were traded everyday. Therefore, prices for other maturities did not change especially for longer maturities.
PS: The data I've shown above is hypothetical. Actually, I've seen this type of futures price in the silver market. The curvature in price actually happens on longer maturities like one trading in 2015 2016, etc.
There is no such thing as seasonality of futures prices in things like metals that can be stored forever without degradation, by the way (I think someone mentioned that earlier).
That would be true but then the curve would not make sense. So question A, how is one able to borrow gold sell it in September and buy it back later in the year. Not sure how one does this.
Anyways i did some quick googling and I expected Gold demand peaks in September to December based on holiday gift season and jewelry demand.
So while there is no real degration, it very well could be the case that lets 1000 lots of gold is in circulation, and demand spikes to 1200 lots in September therefore to increase supply one needs to price over a future curve since then the person holding gold for the long-term who has gold storage (does this even exist?) is motivated to sell it buy back later, while if the curve is flat why do I care to sell it and buy it back, remember when I sell I make $$$ which I can invest at a interest rate for that time period.
Lastly, why the eff you even looking at gold if you want to learn how a forwards curve works. As SirTrades explained, its a prescious metal pretty boring and lame forward curve. Go look at Copper, Energy, euro-dollars you know something that actually requires TIME.
To the OP, I reiterate, most likely you have bad/stale data. It is exceedingly rare for gold to not have a positively sloped futures curve across all maturities.
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