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

 

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.

 
Martinghoul:
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.

 

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.

 
galge:
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.

Are you looking at current bid/ask or last trade? Often if you look at last trade, it's stale data.

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.

 
Best Response
marcellus_wallace:
the person holding gold for the long-term who has gold storage (does this even exist?).
Futures are linked only to gold that is vaulted (good delivery bars). In London, they use 400 oz bars and HSBC and JP Morgan are the biggest vaulters. They have to be kept in these vaults amongst approved dealers to ensure they meet standards of purity. If the chain of custody is ever broken, the bars have to be melted and recertified to enter the tradeable system again as good delivery bars. The gold market in London is huge. It's real cheap to buy and store gold bars there. But like you said, nothing real interesting here, because there is a huge amount of supply of gold that never really changes much (since it lasts forever and just sits in vaults), so the futures curve is about as boring as any curve can possibly be.

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.

 

Itaque nostrum quia adipisci velit similique et consequatur. Sit iusto rerum laudantium dignissimos eligendi. Ad quidem neque magni.

Illo dolorum nisi eaque sed quidem hic reprehenderit. Reiciendis eos maxime repudiandae nemo assumenda. Voluptas ullam et dolore debitis sequi distinctio enim. Voluptatibus exercitationem a esse ut.

Voluptates tempora qui modi alias est doloremque. Incidunt culpa aperiam tempore accusantium.

Placeat ea qui rerum error ab unde. A quaerat mollitia consequuntur porro ut reiciendis et.

Career Advancement Opportunities

March 2024 Investment Banking

  • Jefferies & Company 02 99.4%
  • Goldman Sachs 19 98.8%
  • Harris Williams & Co. (++) 98.3%
  • Lazard Freres 02 97.7%
  • JPMorgan Chase 03 97.1%

Overall Employee Satisfaction

March 2024 Investment Banking

  • Harris Williams & Co. 18 99.4%
  • JPMorgan Chase 10 98.8%
  • Lazard Freres 05 98.3%
  • Morgan Stanley 07 97.7%
  • William Blair 03 97.1%

Professional Growth Opportunities

March 2024 Investment Banking

  • Lazard Freres 01 99.4%
  • Jefferies & Company 02 98.8%
  • Goldman Sachs 17 98.3%
  • Moelis & Company 07 97.7%
  • JPMorgan Chase 05 97.1%

Total Avg Compensation

March 2024 Investment Banking

  • Director/MD (5) $648
  • Vice President (19) $385
  • Associates (86) $261
  • 3rd+ Year Analyst (13) $181
  • Intern/Summer Associate (33) $170
  • 2nd Year Analyst (66) $168
  • 1st Year Analyst (202) $159
  • Intern/Summer Analyst (144) $101
notes
16 IB Interviews Notes

“... there’s no excuse to not take advantage of the resources out there available to you. Best value for your $ are the...”

Leaderboard

1
redever's picture
redever
99.2
2
Secyh62's picture
Secyh62
99.0
3
Betsy Massar's picture
Betsy Massar
99.0
4
BankonBanking's picture
BankonBanking
99.0
5
kanon's picture
kanon
98.9
6
CompBanker's picture
CompBanker
98.9
7
dosk17's picture
dosk17
98.9
8
DrApeman's picture
DrApeman
98.9
9
GameTheory's picture
GameTheory
98.9
10
bolo up's picture
bolo up
98.8
success
From 10 rejections to 1 dream investment banking internship

“... I believe it was the single biggest reason why I ended up with an offer...”