Tuesday, March 1, 2011

The Contango Beast Strikes Natural Gas Again, UNG Loses 25% By Doing Nothing

Readers know that we track the contango situation regularly. Natural gas contango is the destroyer of UNG as it needs to roll over its futures contracts every single month. Whenever the next month price is higher, UNG acquires fewer contracts for the same amount of money. Such is the nature of the beast, that it usually makes it a dreadful investment.

This is the current situation today:

From April to May the contango is 1.91%. That is the one that directly affects UNG. it does not appear as much, but if it happened every single month, it is the equivalent of 25.5% in a year.

1.019 ^ 12 = 1.255

You lose that much just by doing nothing.

Granted,. this has been worse in the past, but the situation had reversed nicely in late 2010. The correlation between contango and prices dropping is very high. The correlation between backwardation and prices rising is also high. It's really buyer beware.

Stumble Upon Toolbar

No comments:

Financial TV

Blog Archive

// adding Google analytics