The spot price is what a commodity costs for immediate purchase and delivery today. The futures price is the price agreed now for delivery on a future date. The gap between the two is called the basis — and understanding why it exists, and how it shrinks, explains most of how commodity futures behave.
Why isn't the futures price the same as the spot price?
Because holding a commodity until the future date has costs — and sometimes benefits.
Imagine Kavita could buy silver today at the spot price and simultaneously sell a futures contract to deliver it three months later. Between now and delivery she must pay for storage and insurance, and her money is locked up (losing the interest it could have earned). For her to break even, the futures price must be roughly:
Futures price ≈ Spot price + cost of carry (interest + storage + insurance, minus any benefit of holding the physical goods).
This "cost of carry" logic keeps spot and futures tethered. If the futures price drifted far above spot-plus-costs, traders like Kavita would buy spot, sell futures, and pocket a riskless margin — and their very buying and selling would pull the prices back in line.
What are contango and backwardation?
Two names for which side the gap sits on:
| Situation | Meaning | Typical reason |
|---|---|---|
| Contango | Futures price above spot | Normal cost of carry — storage and interest make "later" cost more |
| Backwardation | Futures price below spot | Immediate scarcity — buyers pay a premium to have the goods now |
Contango is the everyday state for storable commodities like gold. Backwardation appears when the physical market is tight — say a supply disruption makes crude oil for this month precious, while the market expects normal supply to resume later. Watching whether a commodity sits in contango or backwardation is a quick read on how tight its physical market is.
What exactly is basis, and why does it narrow?
Basis is simply the difference between the two prices (commonly quoted as spot minus futures; some texts flip the sign — what matters is the size of the gap, and being consistent).
Here is the reliable part: as expiry approaches, the basis shrinks toward zero. On the delivery date, a futures contract is a spot transaction — an agreement to deliver "in the future" where the future has arrived. Two prices for the same thing on the same day must converge; if they didn't, arbitrageurs would trade the gap away instantly.
So a three-month gold future might trade ₹600 per 10 grams above spot today (an illustrative figure), ₹300 above with six weeks left, and within a few rupees of spot in expiry week. The gap decays as the carrying period — and its cost — runs out.
This convergence is why hedgers can trust futures: the farmer or jeweller hedging a price knows the contract will meet the physical market at expiry. It is also background for rollovers — when traders shift from an expiring contract to the next month's, they pay or receive that month's carry; see how do commodity futures work.
Does this matter for a trader who never touches delivery?
Yes, quietly. If you are long a futures contract in contango and the spot price stays flat, your contract's price still drifts down toward spot as expiry nears — the carry premium you bought melts away. Rolling a position month after month in a contango market has a persistent small cost for longs (and, symmetrically, for shorts in backwardation). Many beginners lose money "mysteriously" in a flat market for exactly this reason.
Things to keep in mind
- Futures ≈ spot + cost of carry; large deviations get arbitraged away quickly.
- Contango = futures above spot (normal for storable goods); backwardation = futures below spot (a scarcity signal).
- Basis reliably narrows into expiry — convergence is the one near-certainty in futures pricing.
- In a contango market, holding or rolling long positions has a built-in drag even when spot goes nowhere; budget for it.
Read next
What are commodity lot sizes and contract specifications? — Next, the numbers on the spec sheet that decide how big your position really is.