A situation where the futures price for a commodity is lower than the current spot price, meaning future delivery months are cheaper than nearer delivery months. This typically happens when there is strong immediate demand or expected supply constraints.
Gold is currently trading at $2,000 per ounce for immediate delivery, but the three-month futures contract is $1,980. The $20 discount reflects expectations of future supply increasing or demand decreasing. This is backwardation.
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