Backwardation describes a market where the forward or futures price of an asset is lower than its current spot price, so the forward curve slopes downward over time. In precious metals it is the unusual state: it occurs when the cost of borrowing the physical metal rises above the dollar funding rate, pushing the forward to a discount to spot.
What Causes Backwardation in Metals?
In gold, the forward rate is roughly the dollar interest rate minus the gold lease rate. When metal is scarce to borrow, lease rates spike — and if they rise above dollar rates, the forward price turns negative relative to spot, producing backwardation.
This typically signals tight physical supply or strong demand to hold the metal now rather than later. Crucially, metals markets have no lender of last resort, so a squeeze in metal-leasing liquidity can push rates up sharply.
Why Does Backwardation Matter?
Backwardation flips the usual cost-of-carry logic. Instead of paying a premium to hold an asset forward, the forward trades at a discount, which can reflect stress or scarcity in the physical market.
For anyone hedging or rolling a position, a downward-sloping curve changes the economics — the forward is cheaper than spot, the reverse of the typical metals market.
Backwardation vs. Contango
Backwardation is a downward-sloping curve, with forwards below spot. Contango is the normal upward slope, with forwards above spot. In gold and silver, plentiful lease supply tends to produce contango, while metal scarcity can tip the market into backwardation.
Related Terms: Contango, Loco London, Gold/Silver Ratio, Swap Points. See the full glossary for more.
This is educational content, not financial or trading advice.