One of the signs watched to determine risks of inflation or deflation is the relationship of current commodities prices to those expressed in future contracts. Here are two words we are going to be seeing and hearing as the commodities markets continue to grow in size and importance.
Contango is the situation where, and the amount by which, the price of a commodity for future delivery is higher than the spot price, or a far future delivery price higher than a nearer future delivery. The opposite market condition to contango is known as backwardation.
Backwardation is described as the situation where, and the amount by which, the price of a commodity for future delivery is lower than the spot price, or a far future delivery price lower than a nearer future delivery. In fact, backwardation is a situation were the cash price of a commodity is pregnant with a premium a buyer is willing to pay, for having the immediate delivery of the commodity.