Male voiceover: If a commodities trader would tell you
that a market is in Contango,
they're just referring to the idea
that it is cheaper today.
So if we're talking about now,
it's cheaper to buy that commodity on the Spot Market.
It's cheaper to buy it on the Spot Market
than it is to agree to buy it at some futures date
or some future date using a Futures or Forward Contract.
In the future, it is more expensive.
It is more expensive.
Let's say that that commodity is gold
and I'll just make up gold prices for the sake of simplicity.
This isn't the current gold prices.
Let's say that today, you can go on the Spot Market
and buy gold at $1,500 per ounce
but if you wanted to buy gold,
if you don't want the gold today
and you wanna enter a Futures Contract
to buy the gold, one year from now.
Let's say the future is now one year later, one year from now.
Instead of buying, let me write this down.
This is the Spot Market.
Instead of buying in the Spot Market for $1,500 an ounce,
you could agree to buy it one year later,
one year from now for $1,600 an ounce
and so to a trader, this would be a market in Contango.
What I wanna point out is that this isn't
that strange of a thing
because if you think about it,
you have two options.
If you wanna invest in gold and gold is something
that you wanna invest for the long term.
You're not gonna eat the gold.
You're not going to use it to fuel your cars or anything like that.
In the situation with gold, let's say you wanna keep gold
for definitely a year but maybe many, many, many years.
You have two ways of making that investment.
You could take your $1,500 and buy the gold today
but if you take your $1,500 and buy the gold today,
you would lose the returns on that $1,500 on that cash
that you could invest other places.
You have the opportunity cost of the cash.
So had you invested that cash some place else?
And you also have to store that gold.
In the case of gold storage,
you have to find some place really secure
and maybe you need to insure the gold.
You need it so that people can't steal it and all the rest.
You also have the storage cost.
In general, you could save both of these costs,
if you enter into the Futures Contract.
Instead of just buying $1,500 of the Spot Market today,
you could enter into this contract
where you can definitely buy the gold one year later
for $1,600 an ounce and then you could take your $1,500,
and get interest on it, so that will grow
and you'll also save money on the storage cost.
In either way, especially for commodities like gold, precious metals,
things that aren't consumable,
things that people don't need immediately for consumption,
it's not unusual for a market to be in Contango.
Sometimes you might see a severe Contango
maybe with something that is consumable.
So maybe right now, oil is trading at $50 a barrel.
Once again, I'm just making up the numbers
and in the future, the Futures price is at $150.
This is probably taking more into account
than just the storage cost and the opportunity cost of your cash
and this might be because there's a surplus
for all oil consumption today.
There's just a big glut in the market
and people are just trying to dump it
or there might be some type of perceived shortage in the future.
So, you could think about it either way
but this is very unusual.
This type of severe Contango is very, very unusual.
You would expect to see kind of minor ones.
Things that take cost into consideration
but not something like this.
In something like this, you can usually arbitrage it out
and make some money assuming you can store oil
or you have oil to sell or buy and all the rest of that.