Futures Above Spot: Understanding Gold's Cost of Carry
Gold futures trading above spot prices is often misunderstood as a bullish signal for gold's price in the future. However, this phenomenon is normal and rooted in the cost of carry, which is influenced by interest rates.
The difference between owning gold today and owning it a year from now lies in the opportunity cost of holding physical gold. When investors buy gold today, they give up potential returns that their money could have earned elsewhere, such as in a bank or US Treasuries. This 'financing cost' is a key component of the futures price.
The World Gold Council notes that contango, where forward futures prices sit above spot prices and rise with maturity, is the typical state for gold futures. This is due to the low storage costs associated with holding gold, which makes it easy to store and transport. In contrast, commodities like natural gas or crude oil require specialized storage facilities and incur higher storage costs.