In finance, backwardation is the condition where future prices are lower than spot prices. This happens when the demand for a commodity is greater than the supply, and producers are willing to sell for less in the future in order to get rid of their inventories. Backwardation can also happen due to temporary disruptions in the supply of a commodity, such as a bad harvest. In general, backwardation is seen as a sign that the market is bullish on a particular commodity.

Backwardation can be contrasted with contango, which is when future prices are higher than spot prices. This happens when there is more of a commodity available than what people are currently demanding, and producers are therefore willing to wait and sell at higher prices in the future. Contango is generally seen as a sign that the market is bearish on a particular commodity.

In financial markets, backwardation and contango are important concepts to understand, because they can affect the prices of futures contracts. For example, if there is backwardation in the market for gold, then people who are long gold futures will tend to make money because they will be able to sell their gold at a higher price in the future. On the other hand, if there is contango in the market for gold, then people who are long gold futures will tend to lose money because they will have to sell their gold at a lower price in the future.

Backwardation and contango can also affect the prices of exchange-traded funds (ETFs) that track commodities. For example, if there is backwardation in the market for crude oil, then ETFs that track crude oil will tend to go up in value because they will be able to sell their commodity at a higher price in the future. On the other hand, if there is contango in the market for crude oil, then ETFs that track crude oil will tend to go down in value because they will have to sell their commodity at a lower price in the future.