MacroVoices #373 Ole Hansen: Commodities Update
Macro Voices
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Backwardation and Contango
Backwardation is simply the shape of the futures curve. When it's in backwardation, that basically means you're paying the highest price in the spot market. The opposite can be said about when it's in contango. Why is gold in contango? Because if you're buying gold today, you have to borrow the dollars. If you borrow dollars for a year, that will cost you 5%. Lo and behold, the contango of one year in gold is roughly 5%. That's really the reflection of the funding costs.
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