Recent Contango Patterns Hurt Commodities Investors

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Commodities, Macroeconomics

The recent commodity crash posed plenty of problems for commodities investors, but “roll penalties” are starting to cause new losses for already-troubled investors. Key commodity indexes are suffering from these penalties, spurred when metals and other commodities, such as oil and crop futures, took a drastic fall earlier this winter.

In a recent article, writer Gregory Meyer explains: “Some markets that major commodity indexes track have tilted into an extreme version of a pattern known as Ëœcontango,’ in which commodities for delivery within weeks cost less than those for delivery later on. Index-tracking funds often Ëœroll’ nearby contracts from one month to the next as they expire. In a contango market, that means selling low and buying high on a monthly basis.”

More and more investors are beginning to study these contango patterns, hoping to understand recent developments. Last week, National Public Radio examined contango patterns, broadcasting a program, now available online, on contango in the oil markets. Writing for the Wall Street Journal, Meyer expects that investors will take an active stance in developing their commodity portfolios, with most investors planning to avoid “long-only” indexes for their investment arrangements.

In the gold markets, the gold contango has undergone a considerable decline, but backwardation, which happens when a futures delivery is set at a lower price than that for immediate delivery, is becoming more common for gold futures. According to GoldSeek, “a similar situation happened two years ago when the LME defaulted on its nickel contract. The LME simply imposed backwardation limits and changed the terms of delivery, allowing shorts to delay delivery and pay a daily penalty of about 1% to longs demanding delivery.”

To learn more about on contango vs. normal backwardation, visit Investopedia, a Forbes digital company that explains the difference between the two and can help readers develop their own ideas on how this turn could affect metals markets and other commodities investments.

–Amy Edwards

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