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Subject
ART CASHIN: Traders Are Talking About A Gold Conspiracy Theory And There's Evidence To Back It Up!
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Defining Backwardation
First, letS introduce a key concept. Most traders define "backwardation" for a commodity as when the price of a futures contract is lower than the price of the same good in the spot market.
In every market, there are always two prices for a good: the bid and the ask. To sell a good, one must take the bid. And likewise, to buy the good, one must pay the ask. In backwardation, one can sell a physical good for cash and simultaneously buy a futures contract, and make a profit on the arbitrage. Note that in doing this trade, one's position does not change in the end. One begins with a certain amount of the good and ends (upon maturity of the contract) with that same amount of the good.
Backwardation is when the bid in the spot market is greater than the ask in the futures market.
[
link to www.caseyresearch.com
]
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