In an attempt to avoid physical delivery of the contract, funds will have to roll futures contracts. Consequently, as a fund rolls a contract that is about to mature, it may incur a loss or gain when purchasing a later-dated contract. If the later dated contract costs more than the spot price, the commodity is said to be in a state of contango. Conversely, if the later contract costs less than the spot price, the market is in backwardation, which is favorable as the fund may roll the contracts at a gain.
Nevertheless, commodities and futures are typically volatile and not suitable for all investors.
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Max Chen contributed to this article.