Retracement occurs when the current price of a commodity is higher than the projected price. Natural disasters and civil unrest can contribute to this, but holding onto futures during the pullback period can lead to excellent returns in subsequent years.
As a phenomenon that occurs from time to time with options and futures, a retracement state exists when the spot or current price of a given commodity is higher than the projected or forward price. In short, the futures price in the next few delivery months is significantly higher than the price set for the distant delivery months. Here are some factors that can contribute to the occurrence of backlash.
There are several factors that can lead to a pullback incident with a given set of futures. One has to do with naturally occurring events, such as weather-related disasters. Hurricanes, earthquakes, and droughts can have a significant impact on both current prices and projected prices in the coming months. Futures can be anticipated to fall in value during a recovery period, if the primary source of those futures has recently suffered some type of natural disaster. However, if futures can hold long enough to get past the rally period, there is a good chance that the pullback period will end and futures will resume an upward price trend.
Similarly, the incidence of civil unrest or even war can also have an impact on the current and projected state of futures prices. Prolonged periods of armed conflict can inhibit futures prices from rising over a long period of time, making them unattractive to many investors. As with natural disasters, depressed wartime futures often flourish in the first few years after the end of the conflict. Any investor who can afford to hold onto the future during the lookback period often earns excellent returns in subsequent years.
Typically, futures markets tend to trade with a currently lower-priced futures price, and with the expectation that futures will increase in value in the coming months. The hope is that the next several delivery months will achieve a price that slowly increases with each successive delivery period, or at least maintain a level price. In general, it is not considered a particularly good sign when the current futures price is anticipated to exceed the price of a few months down the road. Investors tend to want to unload futures that appear to be entering a retracement state, although this may not be the most effective strategy in the long run.
Smart Asset.
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