If a commodities
trader tells you that a market is
in backwardation, they're essentially
saying that it costs more to buy
whatever commodity they're talking about now than
it would to buy it later, to go into a futures
contract to buy whatever that commodity might
be-- silver, gold, or oil-- to buy it later. So later is cheaper. So, the question you might
ask yourself, or really, any trader might ask
themselves, is this bullish or is this a bearish? Is this a bullish situation? And there's no obvious
rule of thumb here. But if someone says,
look, to get something now costs more than to
get it later, what does that tell you about
what's happening in the market? Well, it tells you that
people are desperate. Because if they
weren't desperate, the rational thing to
do would just be wait. Wait a little while and
get it cheaper for later. Or, if you don't need
that oil right now, if you don't need
that corn right now, or if you don't need
that gold right now, instead of paying
more for it right now, just say, look, I could
enter into a futures contract for delivery of
that gold or oil or corn or whatever it is at a later
date for a cheaper price. And I wouldn't even have to
store it between now and then. So, if some people were rational
and if they weren't desperate, this wouldn't happen. But because they're
willing to do this, they're willing to pay more
now than for a future delivery date, it shows you that there
might be some type of shortage. In the case of oil,
maybe the oil supply has been disrupted somehow. In the case of corn,
for whatever reason, some crops have been
destroyed, and people need to eat, and
all of the rest. For commodities that
aren't used, so to speak, like gold, if you see
backwardation there, I wouldn't say-- I mean, it's
definitely still desperation, but it's not out of a core need. If gold goes in
the backwardation, it's more because of some
type of irrational desire to have their hands
on the gold now than have their hands
on the gold later. Maybe they think society
is going to collapse, and the future
delivery dates of gold aren't going to
actually hold up. Who knows what they are? So in general, when people talk
about backwardation, because of this desperation
in the market, people tend to perceive
it as a bullish signal. Obviously if people
are desperate, there's demand for this thing. My argument is, you can't
just look at one tea leaf out of a bunch of tea leaves
and say whether it's bullish or bearish. But what you could
say is, look, there's something somewhat
abnormal going in the market due to
some type of desperation. It's a little less irrational
it it's due to a storage, but it could be very irrational
if it's a due to just wanting your hands on it. Because frankly, if you
wanted to buy gold just for the sake of
investing in gold-- you're not going to eat it
or use it to fuel your car or anything like that-- it
would make complete sense, or even better, if
you already held gold in this type of a market that's
undergoing backwardation. The rational thing
to do would be to sell your gold
now for more money, and then agree to buy it
back later for cheaper. And so once this later
date comes about, you'll still have
your gold, and you would have made some
risk free profits.