Spot vs Futures (Commodity)

Two prices for the same thing

Every commodity has two prices running side by side. The spot price is what you pay to take delivery right now, the price in the physical mandi or bullion market today. The futures price is what you agree today to pay (or receive) for delivery on a fixed future date, traded on exchanges like the MCX and NCDEX.

If gold spot is ₹72,000 per 10 grams and the three-month MCX future is ₹73,000, that ₹1,000 gap is not random; it reflects the cost of carry.

What drives the gap

The difference between futures and spot comes mainly from three things: storage costs (warehousing, insurance), financing costs (the interest on money tied up holding the commodity) and, working the other way, the convenience yield (the benefit of physically holding it).

When futures trade above spot, the market is in contango, normal for storable commodities where carry costs dominate. When futures trade below spot, it is backwardation, signalling tight near-term supply or strong immediate demand. Indian crude and natural gas contracts on MCX often flip between these states.

Why it matters to traders and hedgers

The spot-futures relationship is the basis for hedging and arbitrage. A jeweller can hedge by buying gold futures to fix his purchase cost. An arbitrageur watches the basis (futures minus spot); if the gap diverges too far from fair carry, a cash-and-carry trade can lock in low-risk profit.

At expiry, futures and spot must converge, since the future simply becomes immediate delivery. For Indian retail investors, the practical takeaway is that futures prices are not predictions of where spot will go, they are today's spot adjusted for carry. Reading whether a contract is in contango or backwardation tells you a lot about real-world supply tightness.