Founders Discussion Review:
When do Gold & Silver Futures Spreads Warn of a Squeeze?
The following is a Synopsis from these previous lectures:
Futures Spreads Review Notes
Components of futures spreads: the difference between a well supplied physical commodity is a positive number. It is added to the spot price to create a futures price value.
Therefore a Futures price is the spot price plus more costs added to “carry” that position until delivery at spot.
Cost of Carry
The price differential between spot and that future delivery of spot is commonly called the “cost of carry”;
Spot price + Cost of Carry (prorated) = Futures price
Cost of carry is made up of several components. The most well known of these are: Opportunity cost of money used, Storage costs, and insurance costs.
Opportunity = money used (times) interest rate for the time used
Storage: warehouse, vault, silo, tanker etc
Insurance: associated with contract guarantees etc
When a commodity is “well supplied” the total supply available for delivery matches the immediate demand for that commodity on the spot.