TL;DRWhen futures prices are higher than the current spot price. The default state for most commodity markets due to storage and financing costs.
Contango is when the futures price is higher than the spot price, creating an upward-sloping curve. Each successive month costs more.
This is normal because storing a physical commodity costs money. Warehouse space, insurance, and financing all add to the price of future delivery.
For long position holders, contango creates a negative roll yield. When you roll, you sell the cheaper near contract and buy the more expensive far contract. This cost adds up over multiple roll periods.
This is why commodity ETFs that hold futures often underperform the spot price. They constantly pay the contango cost on every roll.
Contango is the normal state and doesn't indicate direction. Steep contango (large price difference between months) signals the market expects the current oversupply or low demand to persist.
Equity index futures trade in slight contango based on interest rates minus dividend yields.
Gold contango
Gold spot at $2,000. Two-month futures at $2,010.
$10 premium reflects two months of storage and financing. Rolling a long position costs $10/oz ($1,000 per GC contract) per roll.
Ignoring contango when holding long futures
Check the curve shape. Steep contango erodes returns even if spot prices rise.
Assuming commodity ETFs track spot
Most hold futures and bleed value in contango. Check the prospectus.