Commodity curves used to be relatively dependable. Gold, for instance, was pretty much always in a state of perfect contango irrespective of price due its money-like status. This currency-esque characteristic therefore made its curve a reflection of the time value of money.
Note the following chart of the gold curve two years ago:
Meanwhile, here’s how the time value of money works, via Financescholar.com:
But something has happened to the gold curve recently — a certain flattening at the front-end. Note the following chart:
Meanwhile crude, which was usually more partial to a backwardated state being a scarce commodity (as can be seen by its state two years ago):
…is now afflicted by a somewhat permanent state of contango:
This, some pundits would say, is due to excessive front-end supply and/or the reflection of longer-term supply concerns in the future.
But do you notice how the back-end portion of the curve looks awfully familiar?
Could it be, we propose, that crude and gold are actually swapping their financial properties? Could it be that the back-end of the crude curve is actually beginning to reflect oil’s new position as a gold-esque inflation hedge and bona fide investment class? Could it be this more than concerns over future supply are keeping the market in contango?
As John Kemp at Reuters always stresses, the forward curve has never been a reliable forecast for long-term prices and it would be foolish to judge it to be so.
Meanwhile, on the gold side, could it be that the curve is taking on the properties of a more physically constrained commodity like crude? The front-end’s flattening in that case could genuinely be an indicator of backwardation to come.
Interesting times, eh?
Related links:
Getting to the bottom of negative gold-leasing rates – FT Alphaville
Dear Paul, the greatest monetary crisis of all times is coming – FT Alphaville
Energy is currency – FT Alphaville
It’s not a liquidity crisis, it’s an energy crisis stupid – FT Alphaville
A commodity anchor, or oil as money – FT Alphaville