Editing Normal backwardation (section)

{{Short description|Situation when futures prices are below the expected spot price at maturity}}
{{Use dmy dates|date=March 2020}}
[[File:Contangobackwardation.png|thumb|right|300px|The graph depicts how the price of a single forward contract will behave through time in relation to the expected future price. A contract in backwardation will increase in value until it equals the spot price of the underlying at maturity. Note that this graph does not show the [[forward curve]] (which plots against maturities on the horizontal).]]

'''Normal backwardation''', also sometimes called '''backwardation''', is the market condition where the price of a commodity's [[forward contract|forward]] or [[futures contract]] is trading below the ''expected'' [[spot price]] at contract maturity.<ref>[http://www.investopedia.com/articles/07/contango_backwardation.asp Contango Vs. Normal Backwardation] {{Webarchive|url=https://web.archive.org/web/20140726183442/http://www.investopedia.com/articles/07/contango_backwardation.asp |date=26 July 2014 }}, ''Investopedia''</ref> The resulting futures or [[forward curve]] would ''typically'' be downward sloping (i.e. "inverted"), since contracts for further dates would typically trade at even lower prices.<ref>The curves in question plot market prices for various contracts at different maturities—cf. [[yield curve]]</ref> In practice, the expected future spot price is unknown, and the term "backwardation" may refer to "positive basis", which occurs when the current spot price exceeds the price of the future.<ref name=Facts&Fantasies>{{cite journal |last1=Gorton |first1=Gary |first2=K. Geert |last2=Rouwenhorst |title=Facts and Fantasies about Commodity Futures |journal=Financial Analysts Journal |year=2006 |volume=62 |issue=2 |pages=47–68 |doi=10.2469/faj.v62.n2.4083 |s2cid=14880480 |url=http://www.nber.org/papers/w10595.pdf }}</ref>{{rp|22}}

The opposite market condition to normal backwardation is known as [[contango]]. Contango refers to "negative basis" where the future price is trading above the expected spot price.<ref name=Facts&Fantasies/>

Note: In industry parlance backwardation may refer to the situation that futures prices are below the ''current'' spot price.<ref>{{cite web|url=https://www.investopedia.com/terms/b/backwardation.asp| publisher=[[Investopedia]]|title=Backwardation|access-date=21 June 2020}}</ref>

Backwardation occurs when the difference between the [[forward price]] and the [[spot price]] is less than the [[cost of carry]] (when the forward price is less than the spot plus carry), or when there can be no delivery arbitrage because the asset is not currently available for purchase.

In a state of backwardation, futures contract prices include compensation for the risk transferred from the underlying asset holder to the purchaser of the futures contract. This means the expected spot price on expiry is higher than the price of the futures contract. Backwardation 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 [[Commodity Exchange|COMEX]] to [[Chicago Board of Trade|CBOT]] warehouses.{{Citation needed|date=May 2008}} Gold has historically been positive with exception for momentary backwardations (hours) since gold futures started trading on the Winnipeg Commodity Exchange in 1972.<ref>{{cite web | author = Antal E. Fekete|  title = RED ALERT: GOLD BACKWARDATION!!!(page 3)| date = 2 December 2008| url = http://www.professorfekete.com/articles%5CAEFRedAlert.pdf| access-date = 20 December 2008}}</ref>

The term is sometimes applied to forward prices other than those of [[futures contract]]s, 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". Negative lease rates for silver may indicate bullion banks require a risk premium for selling silver futures into the market.