Metals Curve Shape

This will be a quick look at metals which are the quintessential “cost of carry” contango markets.  Gold and silver are the definition of non-perishable commodities and nearly always in contango.  Copper futures curves are almost always in contango as the supply chain may be subject to episodes of sudden shortages.

Following is a chart of the year-end forward curves for the Comex Gold futures contract

 

All gold futures curves are contango and each year gold prices rose.  On 12/13/2012, gold was in steep contango and next year’s gold price is unknown. Gold has been one of the most bullish commodity markets of the last ten years and, at the same time is always in contango.  .  Gold is the textbook case that refutes the argument of bearish contango.

Silver follows closely in gold’s footsteps and is sometimes called the “poor man’s gold” since silver’s price level is so much lower. 

Silver, which has some industrial use, is again in contango except for the anomalous far back months of the Dec 2011 and 2012 curves.  And again, contango appears to show no relation to future declines. 

Copper, a truly industrial metal, is subject to occasional unexpected supply shocks, mainly from strikes in copper producing regions.  Under such conditions we would expect to see the futures curve in backwardation.  Supply interruptions can be moderated by large inventories.  The cost of carrying large inventory is relatively low in today’s zero rate world.  Rising rates may bring backwardation back to copper markets.  Looking at the copper curves we note:

2007 contango and backward then much lower price in 2008

2008 contango then much higher in 2009

2009 contango then higher in 2010

2010 backwardation then lower in 2011

2011 contango and backward then higher in 2012

2012 contango and backward then ?

I just don’t see the pattern of contango followed by lower prices or the converse.  Again, generalized curve shape has no predictive value in copper or any other metal futures contract.