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+A Complete Guide to the Futures mArket
+For the moment, ignore the last column in Table 18.1 and focus instead on the unadjusted con­
+tinuous futures price (column 6). At the start of the period, the actual price and the unadjusted 
+continuous futures price are identical. At the first rollover point, the forward contract (November 
+2012) is trading at an 85
+­cent discount to the nearby contract (July 2012). All subsequent prices of 
+the November 2012 contract are then adjusted upward by this amount (the addition of a positive 
+nearby/forward spread), yielding the unadjusted continuous futures prices shown in column 6. At 
+the next rollover point, the forward contract (July 2013) is trading at an 86.25
+­cent discount to the 
+nearby contract (November 2012). As a result, all subsequent actual prices of the July 2013 contract 
+must now be adjusted by the cumulative adjustment factor—the total of all rollover gaps up to that 
+point (171.25 cents)—in order to avoid any artificial price gaps at the rollover point. This cumulative 
+adjustment factor is indicated in column 5. The unadjusted continuous futures price is obtained by 
+adding the cumulative adjustment factor to the actual price.
+The preceding process is continued until the current date is reached. At this point, the final cumu­
+lative adjustment factor is subtracted from all the unadjusted continuous futures prices (column 6), 
+a step that sets the current price of the series equal to the price of the current contract (November 
+2014 in our example) without changing the shape of the series. This continuous futures price is indi­
+cated in column 7 of Table 18.1. Note that although actual prices seem to imply a net price decline of 
+329.50 cents during the surveyed period, the continuous futures price indicates a 443
+­cent increase—
+the actual price change that would have been realized by a constant long futures position.
+In effect, the construction of the continuous series can be thought of as the mathematical equiva­
+lent of taking a nearest futures chart, cutting out each individual contract series contained in the 
+chart, and pasting the ends together (assuming a continuous series employing all contracts and using 
+the same rollover dates as the nearest futures chart).
+In some markets, the spreads between nearby and forward contracts will range from premiums to 
+discounts (e.g., cattle). However, in other markets, the spread differences will be unidirectional. For 
+example, in the gold market, the forward month always trades at a premium to the nearby month.
+2 In 
+these types of markets, the spread­adjusted continuous price series can become increasingly disparate 
+from actual prices.
+It should be noted that when nearby premiums at contract rollovers tend to swamp nearby dis ­
+counts, it is entirely possible for the series to eventually include negative prices for some past periods 
+as cumulative adjustments mount, as illustrated in the soybean continuous futures chart in Figure 18.1. 
+The price gain that would have been realized by a continuously held futures position during this period 
+2 The reason for this behavioral pattern in gold spreads is related to the fact that world gold inventories exceed 
+annual usage by many multiples, perhaps even by as much as a hundredfold. Consequently, there can never ac­
+tually be a “shortage” of gold—and a shortage of nearby supplies is the only reason why a storable commodity 
+would reflect a premium for the nearby contract. (Typically, for storable commodities, the fact that the forward 
+contracts embed carrying costs will result in these contracts trading at a premium to more nearby months.) 
+gold prices fluctuate in response to shifting perceptions of gold’s value among buyers and sellers. Even when 
+gold prices are at extremely lofty levels, it does not imply any actual shortage, but rather an upward shift in the 
+market’s perception of gold’s value. Supplies of virtually any level are still available—at some price. This is not 
+true for most commodities, in which there is a definite relevant limit in total supplies.