Backwardation bullish or bearish | Finance & Capital Markets | Khan Academy | Summary and Q&A

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June 6, 2011
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Backwardation bullish or bearish | Finance & Capital Markets | Khan Academy

TL;DR

Backwardation in commodities market indicates higher costs for buying now compared to later, suggesting desperation and potential shortage, making it a bullish signal.

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Questions & Answers

Q: What does it mean when a commodities market is in backwardation?

Backwardation in the commodities market means that it is more costly to purchase a commodity now compared to buying it through a futures contract for a later delivery date.

Q: Why would someone be willing to pay more for a commodity now instead of waiting to buy it later for a lower price?

People may be willing to pay more due to desperation or urgency in acquiring the commodity, suggesting a potential shortage or disruption in supply.

Q: Is backwardation limited to commodities used for practical purposes, like oil or corn?

No, even commodities like gold can experience backwardation, indicating a desire to possess the commodity immediately rather than as an investment for the future.

Q: How is backwardation perceived in the market?

Backwardation is generally seen as a bullish signal because it indicates demand for the commodity. However, it is important to consider multiple factors before drawing conclusions about market trends.

Summary & Key Takeaways

  • Backwardation in the commodities market means that it is more expensive to buy a commodity now than to enter a futures contract and buy it later.

  • This situation indicates desperation and potential shortage, leading to uncertainty about the future availability of the commodity.

  • Backwardation is generally perceived as a bullish signal in the market, as it shows demand and scarcity.

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