If you have ever heard of backwardation and contango before the last two weeks, then you are hanging around investment circles with very sophisticated players or watching a little too much CNBC. Before the steep increase in gold and silver prices, few had ever heard of these two words outside of speculators in metals. I count myself among those who have never heard of them.
Backwardation is a rare commodity market condition, where the current price of a commodity (gold, silver, platinum, oil, etc.) is higher than the future price. This can happen for several reasons, but the most common is a current shortage of inventory to meet demand or the expiration of futures contracts. This drives the price of the medal up just for supply and demand reasons. This becomes more of an acute condition when the total amount of futures contracts exceeds the current supply by multiples. Some view backwardation as an indicator of a rise in demand and therefore a bullish indicator.
“The traders on the COMEX found themselves in an awkward position when the silver market went into backwardation and there was no inventory to meet demand.”
“The oil futures market shifted into backwardation, signaling that current demand was outpacing future supply expectations.”
“Traders often view backwardation as a bullish indicator, especially when near-term prices exceed those of longer-dated contracts.”
The word contango, to me, is even more obscure, but it is also tied to the commodities markets. Contango and backwardation are antonyms, so this makes contango the normal market pricing and inventory condition. When the market is in contango, fees are paid by buyers to delay (contain) the settlement of a trade.
“The crude oil market entered contango, with future prices trading higher than the spot rate.”
“Investors often see contango as a sign of oversupply or weak near-term demand.”
“In a contango scenario, holding long-term futures contracts can lead to losses.”
These two words are related in the commodities markets, and both are believed to have an English origin in the nineteenth century. But the exact origin is murky, and they can be slang or abbreviations of other words.
“Commodity traders closely monitor shifts between contango and backwardation to anticipate changes in supply and demand.”
“While contango often signals ample inventory and weak short-term demand, backwardation suggests tighter supply and immediate market pressure.”
“The futures curve for natural gas flipped from contango to backwardation after unexpected cold weather boosted near-term consumption.”
