Precious metal futures normally trade above the spot price, with each further delivery month costing slightly more. When that pattern inverts, it carries information.
The normal shape reflects the cost of waiting
Holding metal until a later date costs money: storage, insurance and the interest forgone on the capital tied up in it.
A seller agreeing to deliver in six months therefore quotes a higher price than for immediate delivery, because those costs have to be recovered.
The resulting upward slope across delivery months is called contango, and in a well supplied market it is simply arithmetic rather than a forecast.
Backwardation inverts that arithmetic
Backwardation is the condition where nearby delivery costs more than later delivery, so a buyer pays extra to receive metal now rather than waiting.
In principle this should not persist, because anyone holding metal could sell it today, buy the later contract and capture the difference.
Its persistence therefore implies that holders are unwilling to part with physical metal at any price the forward market is offering.
Physical tightness is the usual cause
The condition typically appears when immediate demand for deliverable metal exceeds what is readily available in the right form and the right location.
Refinery bottlenecks, transport disruption and sudden surges in retail buying can all produce it, since the constraint is on fabricated, deliverable inventory rather than on metal in the ground.
It appears more often and more sharply in silver and the platinum group metals, where above ground stocks are smaller relative to industrial consumption.
Lease rates move alongside it
Metal can be borrowed, and the rate charged for borrowing it rises when lenders are reluctant to release inventory.
Rising lease rates and backwardation usually appear together, because both describe the same underlying shortage of metal available for immediate use.
Watching them jointly gives a clearer reading than either alone, since one can be distorted by a single large participant while both moving together is harder to explain away.
The signal is about now, not later
Backwardation describes a present imbalance in deliverable supply, and it resolves when metal arrives or when demand cools.
It is frequently read as a prediction of higher prices ahead, which it is not; markets have been backwardated during periods when prices subsequently fell.
Treated as a measure of current physical tension rather than as a forecast, it is one of the more informative structures the market produces.