Definitions from the Web
Term: Backwardation
Definition: Backwardation refers to a situation in the futures market where the prices of near-term contracts are higher than the prices of contracts expiring further in the future. It indicates an abnormal market condition where the spot price is higher than the futures price.
Senses:
- Financial Markets: In financial markets, backwardation occurs when the demand for a commodity or financial instrument is higher in the present compared to future expectations. This causes spot prices to increase, creating a downward sloping futures curve.
- Commodities: In commodities trading, backwardation can occur when there is an immediate shortage of a particular commodity, leading to higher spot prices and lower future prices.
Examples (Financial Markets):
- The price of oil in backwardation suggests a current scarcity, encouraging investors to sell futures contracts.
- During times of economic uncertainty, gold often enters a state of backwardation due to increased demand for a safe haven asset.
Examples (Commodities):
- Backwardation in the wheat market signals a current shortage, causing farmers to hold back their produce for higher spot prices.
- Investors taking advantage of backwardation in the natural gas market can purchase cheaper futures contracts and sell them for a profit later on.
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