Contango Report: Precious Metals, Natural Gas, Wheat
Jared Cummans: Contango for commodity traders is as inevitable a phenomenon as taxes; eventually you will come face-to-face with an upward sloping futures curve. In many cases, this simply presents an opportunity to make a play on the respective asset or possibly to re-position current holdings. Contango is most often caused by the storage costs associated with keeping large quantities of commodities in a designated area for a period of time, but it can also reflect market expectations of how a commodity’s price will move. Below, we outline several commodities currently exhibiting contango.
The precious metals sector is almost always contangoed as storing these rare assets comes at a premium. For the time being, gold, platinum and palladium are all in contango for as far out as contracts are offered (through December 2018 for gold, January 2014 for platinum, and March 2014 for palladium). Silver, on the other hand, is a different story. This white metal tends to get a fair amount of industrial use, and its price is often the most volatile of its precious counterparts. Silver currently sits in contango through December of 2014 before falling back in later months.
NG is another asset that is almost always subject to a contangoed environment, and the reason is currently twofold. Aside from the storage costs associated with holding barrels of NG, its rock-bottom prices have led many to believe that it is due for a comeback. NG futures, offered on the NYMEX, are in contango through February 2014, but fall into an even steeper upward sloping curve starting with the May 2015 contract [see also 25 Ways To Invest In Natural Gas].
After last year’s crushing drought, agricultural futures saw their prices endure a fair amount of volatility, and wheat has been no exception. The CBOT’s wheat contracts are stuck in contango through May of 2014 and, of the commodities on this list, this may be one of the most important to watch. With 2012 being one of the hottest years in U.S. history, wheat production took a hit. The supply and demand equation for 2013 could have a dramatic impact on whether or not this commodity can return to normalcy or not.
Related Tickers: SPDR GOld Trust (NYSEARCA:GLD), iShares Silver ETF (NYSEARCA:SLV), Natural Gas ETF (NYSEARCA:UNG), Oil ETF (NYSEARCA:USO), Wheat ETF (NYSEARCA:WEAT).
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