Definition of Contango in finance

Contango is a trading term used to refer to a situation where the price of a future for a specific asset is higher than the expected spot price at the time of the expiration of the future. For example, if it is currently January 2012 and the price of a Sept12 gold future is $1800 but the expected price of gold in September 2012 is only $1700, there is contango.

As a result of contango, the future price is expected to tend to the estimated price at the time of expiration as the expiration date approaches. To use the example above, as it gets closer to September 2012 the gold future price will tend to $1700.

Contango is the opposite of backwardation.