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Backwardation is the name for the condition that the market quotes a lower price for a more distant delivery date, and a higher price for a nearby delivery date. The opposite condition, contango, exists when the market quotes a higher price for a more distant delivery date, and a lower price for a nearby delivery date.

In financial terminology, backwardation means a downward sloping forward curve (as in an inverted yield curve). A backwardation starts when the difference between the forward price and the spot price is less than the cost of carry, or when there can be no delivery arbitrage because the asset is not currently available for purchase.

During contango, the expected spot price at maturity is lower than the forward price. Futures contract price includes compensation for the risk transferred from the asset holder. This makes actual price on expiry to be lower than futures contract price. Backwardation very seldom arises in money commodities like gold or silver. In the early 1980s, there was a one-day backwardation in silver while some metal was physically moved from COMEX to CBOT warehouses.[citation needed] Gold has historically been positive with exception for momentary backwardations (hours) since gold futures started trading on the Winnipeg Commodity Exchange in 1972.[1]

The term is sometimes applied to forward prices other than those of futures contracts, when analogous price patterns arise. For example, if it costs more to lease silver for 30 days than for 60 days, it might be said that the silver lease rates are "in backwardation".



This is the case of a convenience yield that is greater than the risk free rate.

It is argued that backwardation is abnormal,[who?] and suggests supply sufficiencies in the corresponding (physical) spot market. However, many commodities markets are frequently in backwardation, especially when the seasonal aspect is taken into consideration, e.g., perishable and/or soft commodities.

In Treatise on Money (1930, chapter 29), economist John Maynard Keynes argued that in commodity markets, backwardation is not an abnormal market situation, but rather arises naturally as "normal backwardation" from the fact that producers of commodities are more prone to hedge their price risk than consumers. The academic dispute on the subject continues to this day.[2]


Notable examples of backwardation include:

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