What is Backwardation ?
It is possible for the Futures price to prevail below the spot price. Such a situation is known as backwardation. This may happen when the cost of carry is negative, or when the underlying asset is in short supply in the cash market but there is an expectation of increased supply in future – example agricultural products.
As a phenomenon that occurs from time to time with options and futures, a state of backwardation exists when the spot or current price of a given commodity is higher than the projected or forward price. In short, the price of the futures in the near delivery months is significant more than the price that is set for the distant delivery months. Here are some factors that may contribute to the occurrence of backwardation. There are several factors that may lead to an incident of backwardation with a given set of futures. One has to do with naturally occurring events, such as disasters involving weather. Hurricanes, earthquakes, and droughts can have a significant impact on both current prices and also projected prices in the months to come. Futures may be anticipated to drop in value during a recovery period, if the main source of those futures has recently suffered through some sort of natural disaster. However, if the futures can be held on long enough to get through the period of reco
Definition: decreasing futures prices of a commodity. How can this occur in gold? Possible answers: A) A new gold mine in Mexico will come on line increasing total world gold supply. Comment: Unlikely. B) M3 will shrink, making gold cheaper. Comment: This is not the perception. C) Joe the investor distrusts Comex. Further out the contract, more the distrust. Comment: Chicago Board of trade says no one ever lost money on a non-delivered contract. So is backwardation good for gold investors or not? Be well.
