Understanding The Gold Futures Contango & U.S. Gold Premiums
It's not often that the most actively traded gold futures contract is $100/oz above the spot gold price.
This is the current contango in CME gold futures:
Spot gold is trading at ~$3,395 while the most active futures contract, December, is trading ~$3,490. I’ve noticed a lot of attention to this contango, with many believing that it is tariff related. While U.S. gold is trading at a premium due to strong demand and tariff concerns, the futures contango is a product of several factors including interest rates and higher vaulting costs.
The first thing to understand is that in the current gold price environment, a $95/oz spread is still less than 3%. Additionally, the December contract is four months out from today. This means that the cost of carry is higher due to the longer duration to delivery.
There are other factors that must be included in determining the cost of carry. Here is a good way to think of the cost of carry in commodity futures:
Futures Price = Spot Price + Cost of Carry
Cost of carry includes:
Interest rates (financing cost)
Holding physical gold ties up capital. Futures prices include the opportunity cost of that capital—essentially the risk-free rate or LIBOR/SOFR equivalent.
Storage and insurance costs
Gold is expensive to store and must be insured. These costs are baked into the futures premium.
Absence of income (no yield)
Unlike stocks or bonds, gold generates no yield. Investors must pay to hold it rather than earn anything on it.
A notable increase in demand for storing gold in U.S. vaults, particularly in New York and at COMEX-approved facilities, has helped to increase gold storage costs and increased U.S. gold premiums. In addition, the enormous liquidity in COMEX gold futures contracts, and the desire of large fund managers to have their gold located in the U.S. has contributed to premiums for U.S. gold futures.
Finally, I found it interesting to note that last week, precious metals experienced their 1st outflow in 11 weeks (-$200 million). That rare outflow occurred just in time for gold to jump nearly $100/oz this week, and for the gold mining sector to post a week for the history books:
GDX (Daily)
Everything I wrote last weekend remains true today. In fact, Trump’s proposed appointment of Stephen Miran to the FOMC helps to ensure a more dovish, dollar-weakening lean to the Federal Reserve.
Let’s keep our eye on the ball and appreciate that there are some wildly bullish outcomes looming for gold over the next 12 months.
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