According to "Investor Words" a forward curve is a graph of forward interest rate values over different time periods. A forward curve is a way of evaluating the time value of money.

How are those forward curves established and how trustworthy are they? Are they based on a defined mathematical system or are they manually manipulated as well?

Lets take this Gold Forward Curve as example. It shows the expected gold price for the next years. It is obvious that such a long term prediction is absolutely speculative and probably far away from reality. Still I wonder how those forwards curves are created. Why does the curve fall off on some seemingly arbitrary points in time? Are there specific events that already have a fixed date (like an election or a bill that will be decided upon) or are those drops the result of an arithmetic operation?

All those questions lead to the main question I am having. Are forward curves useful tools for trading decisions, although it is obvious that long term prediction is impossible (or we would all be rich)? If they are indeed useful, what kind of information can I gather from such a forward curve?

up vote 3 down vote accepted

As far as trading is concerned, these forward curves are the price at which you can speculate on the future value of the commodity. Basically, if you want to speculate on gold, you can either buy the physical and store it somewhere (which may have significant costs) or you can buy futures (ETFs typically hold futures or hold physical and store it for you). If you buy futures, you will have to roll your position every month, meaning you sell the current month's futures and buy the next month's. However, these may not be trading at the same price, so each time you roll your position, you face a risk. If you know you want to hold gold for exactly 1 year, then you can buy a 1-year future, which in this case according to your graph will cost you about $10 more than buying the front month. The forward curve (or sometimes called the futures term structure) represents the prices at which gold can be bought or sold at various points in the future.

The forward curve for gold says little, in my opinion, about the expected price of gold. The Jan 16 price is 7.9% (or so) higher than the Jan 12 price. This reflects the current cost of money, today's low interest rates. When the short rates were 5%, the price 4 years out would be about 20% higher. No magic there. (The site you linked to was in German, so I looked and left. I'm certain if you pulled up the curve for platinum or silver, it would have the identical shape, that 7.9% rise over 4 years.)

The yield curve, on the other hand,

enter image description here

Is said to provide an indication of the direction of the economy, a steep curve forecasting positive growth.

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