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Cash-Futures Arbitrage
Intuitively, you might think that there is a close relationship between the cash price of a commodity and its futures price. If you do, then your intuition is quite correct. In fact, your intuition is backed up by strong economic argument and more than a century of experience observing the simultaneous operation of cash and futures markets.
As a routine matter, cash and futures prices are closely watched by market professionals. To understand why, suppose you notice that spot gold is trading for $400 per ounce while the two-month futures price is $450 per ounce. Do you see a profit opportunity?
You should, because buying spot gold today at $400 per ounce while simultaneously selling gold futures at $450 per ounce locks in a $50 per ounce profit. True, gold has storage costs (you have to put it somewhere), and a spot gold purchase ties up capital that could be earning interest. However, these costs are small relative to the $50 per ounce gross profit, which works out to be $50 / $400 = 12.5% per two months, or about 100% per year (with compounding). Furthermore, this profit is risk-free! Alas, in reality, such easy profit opportunities are the stuff of dreams.
Earning risk-free profits from an unusual difference between cash and futures prices is called cash-futures arbitrage. In a competitive market, cash-futures arbitrage has very slim profit margins. In fact, the profit margins are almost imperceptible when they exist at all.
