Contextual linking means getting back link (This is contextual link) from existing content of web page. Contextual linking is always good in both internal linking and external linking case. If you are making links to your web pages within your own website content, it would be internal links. You can create internal links by using navigation panel. But contextual linking and navigation panel have different priority to each other. Contextual linking helps to increase actual usability while reading content of your website. If you are getting back link, you should take link from existing content and within content instead of new and uncached content.
Contextual linking is counted best in SEO practice (This is contextual link because this link is given within existing content). With in a month you can get good and unexpected results by this technique. Contextual linking play great role in both On Page and Off Page optimization techniques.