Backwardation

Normal backwardation , sometimes also referred to as backwardization or inverted market , describes a price situation in commodity futures . In the case of backwardation, the forward rate is below the expected spot rate at the due date / expiry of the forward month (delivery date in the future), which represents a reverse market. The futures curve is therefore typically sloping downwards, as the futures contracts are thus traded at lower prices - due to the currently increased demand. Backwardation regularly leads to rolling profits for speculators . The opposite market situation is called contango .

Increased acute demand is a major reason for backwardation. The current demand in the physical market is greater than the demand in the future, or in other words, a significant number of buyers need the raw material immediately and not in weeks or months. Accordingly, a sudden acute shortage of supply can also lead to this situation if buyers assume that prices will fall in the future or that the supply will expand again.

Another reason for backwardation is that sellers expect falling prices on the cash market in the future or want to “hedge” themselves for other reasons, for example because there is a longer period between production and delivery. The seller may then be willing to accept a lower selling price for future delivery, which favors backwardation.

In contrast to contango, the backwardation situation cannot be eased so easily by the market entry of arbitrageurs from outside the industry , such as hedge funds. At most, market players who actually already have stock but do not need it can offer it on the market at short notice and stock up on futures to compensate.

In general, the term backwardation can also be used for prices that have nothing to do with futures , provided that there is an analogous model in pricing. For example, if it costs more to borrow a certain amount of silver for 30 days than to borrow the same amount for 60 days, then we can speak of backwardation of the silver price.

The English economist John Maynard Keynes argues in his book Treatise on Money from 1930 (Chapter 29) that backwardation does not represent an abnormal market situation, but rather as " normal backwardation " stems from the fact that commodity producers want to hedge against their price risk as potential customers. An academic dispute on this question continues to this day.

Web links

• investopedia Website , Articles on Contango and Backwardation and Stock Market .
• Gold , backwardation - profits with raw materials even in falling markets by Eugen Weinberg
• goldfixing.de shows the date structure of many commodities on the basis of forward curves