Silver Futures Trading Basics

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Silver Futures Trading Basics

Silver futures are standardized, exchange-traded contracts in which the contract buyer agrees to take delivery, from the seller, a specific quantity of silver (eg. 30000 grams) at a predetermined price on a future delivery date.

Some Facts about Silver

Silver is a soft, shiny and heavy metallic element with a brilliant white luster. A very ductile and malleable metal, its thermal and electrical conductivity is the highest of all known metals.

Besides being used as a store of value, other main uses of silver include applications in areas such as electronics, photography and as antiseptics. [Click here to learn about the various uses of Silver. ]

Silver Futures Exchanges

You can trade Silver futures at New York Mercantile Exchange (NYMEX) and Tokyo Commodity Exchange (TOCOM).

NYMEX Silver futures prices are quoted in dollars and cents per ounce and are traded in lot sizes of 5000 troy ounces .

TOCOM Silver futures are traded in units of 30000 grams (964.53 troy ounces) and contract prices are quoted in yen per gram.

Exchange & Product Name Symbol Contract Size Initial Margin
NYMEX Silver Futures
(Price Quotes)
SI 5000 troy ounces
(Full Contract Spec)
USD 6,400 (approx. 11%)
(Latest Margin Info)
TOCOM Silver Futures
(Price Quotes)
30000 grams
(Full Contract Spec)
JPY 108,000 (approx. 12%)
(Latest Margin Info)

Silver Futures Trading Basics

Consumers and producers of silver can manage silver price risk by purchasing and selling silver futures. Silver producers can employ a short hedge to lock in a selling price for the silver they produce while businesses that require silver can utilize a long hedge to secure a purchase price for the commodity they need.

Silver futures are also traded by speculators who assume the price risk that hedgers try to avoid in return for a chance to profit from favorable silver price movement. Speculators buy silver futures when they believe that silver prices will go up. Conversely, they will sell silver futures when they think that silver prices will fall.

Learn More About Silver Futures & Options Trading

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An Introduction To Trading Silver Futures

After gold, silver is the most invested precious metal commodity. For centuries, silver has been used as currency, for jewelry, and as a long term investment option. Various silver-based instruments are available today for trading and investment. These include silver futures, silver options, silver ETFs, or OTC products like mutual funds based on silver. This article discusses silver futures trading—how it works, how it is typically used by investors, and what you need to know before trading.

The Basics

To understand the basics of silver futures trading, let’s begin with an example of a manufacturer of silver medals who has won the contract to provide silver medals for an upcoming sports event. The manufacturer will need 1,000 ounces of silver in six months to manufacture the required medals in time. He checks silver prices and sees that silver is trading today at $10 per ounce. The manufacturer may not be able to purchase the silver today because he doesn’t have the money, he has problems with secure storage or other reasons. Naturally, he is worried about the possible rise in silver prices in the next six months. He wants to protect against any future price rise and wants to lock the purchase price to around $10. The manufacturer can enter into a silver futures contract to solve some of his problems. The contract could be set to expire in six months and at that time guarantee the manufacturer the right to buy silver at $10.1 per ounce. Buying (taking the long position on) a futures contract allows him to lock-in the future price.

On the other hand, an owner of a silver mine expects 1,000 ounces of silver to be produced from her mine in six months. She is worried about the price of silver declining (to below $10 an ounce). The silver mine owner can benefit by selling (taking a short position on) the above-mentioned silver futures contract available today at $10.1. It guarantees that she will have the ability to sell her silver at the set price.

Assume that both these participants enter into a silver futures contract with each other at a fixed price of $10.1 per ounce. At the time of expiry of the contract six months later, the following can occur depending upon the spot price (current market price or CMP) of silver. We will walk through several possible scenarios.

In all the above cases, both the buyer/seller achieves buying/selling silver at their desired price levels.

This is a typical example of hedging—achieving price protection and hence managing the risk using silver futures contracts. Most futures trading is intended for hedging purposes. Additionally, speculation and arbitrage are the other two trading activities which keep the silver futures trading liquid. Speculators take time-bound long/short positions in silver futures to benefit from expected price movements, while arbitrageurs attempt to capitalize on small price differentials that exist in the markets for the short term.

Real World Silver Futures Trading

Although the above example provides a good demo to silver futures trading and hedging usage, in the real world, trading works a bit differently. Silver futures contracts are available for trading on multiple exchanges across the globe with standard specifications. Let’s see how silver trading works on the Comex Exchange (part of the Chicago Mercantile Exchange (CME) group).

The Comex Exchange offers a standard silver futures contract for trading in three variants classified by the number of troy ounces of silver (1 troy ounce is 31.1 grams).

  • full(5,000 troy ounces of silver)
  • miNY (2,500 troy ounces)
  • micro (1,000 troy ounces)

A price quote of $15.7 for a full silver contract (worth 5,000 troy ounces) will be of total contract value of $15.7 x 5,000 = $78,500.

Futures trading is available on leverage (i.e., it allows a trader to take a position which is multiple times the amount of the available capital). A full silver futures contract requires a fixed price margin amount of $12,375. It means that one needs to maintain a margin of only $12,375 (instead of the actual cost of $78,500 in the above example) to take one position in a full silver futures contract.

Since the full futures contract margin amount of $12,375 may still be higher than some traders are comfortable with, the miNY contracts and micro contracts are available at lower margins in equivalent proportions. The miNY contract (half the size of the full contract) requires a margin of $6,187.50 and the micro contract (one-fifth the size of a full contract) requires a margin of $2,475.

Each contract is backed by physical refined silver (bars) which is assayed for 0.9999 fineness and stamped and serialized by an exchange-listed and approved refiner.

Settlement Process for Silver Futures

Most traders (especially short term traders) usually aren’t concerned about delivery mechanisms. They square off their long/short positions in silver futures in time prior to expiry and benefit by cash settlement.

The ones who hold their positions to expiry will either receive or deliver (based on if they are the buyer or seller) a 5,000-oz. COMEX silver warrant for a full-size silver future based on their long or short futures positions, respectively. One warrant entitles the holder the ownership of equivalent bars of silver in the designated depositories.

In the case of miNY (2,500-ounce) and micro (1,000-ounce) contracts, the trader either receives or deposits Accumulated Certificate of Exchange (ACE), which represents 50 percent and 20 percent ownership respectively, of a standard full-size silver warrant. The holder may accumulate ACE’s (two for miNY or five for micro) to get a 5,000-ounce COMEX silver warrant.

Role of the Exchange in Silver Futures Trading

Forward trading in silver has been in existence for centuries. In its simplest form, it is just two individuals agreeing on a future price of silver and promising to settle the trade on a set expiry date. However, forward trading is not standard. It is therefore full of counterparty default risk. (Related: What Is the Difference Between Forward and Futures Contracts?)

Dealing in silver futures through an exchange provides the following:

  • Standardization for trading products (like the size designations of full, miNY or micro silver contracts)
  • A secure and regulated marketplace for the buyer and seller to interact
  • Protection from a counterparty risk
  • An efficient price discovery mechanism
  • Future date listing for 60 months forward dates, which enables the establishment of a forward price curve and hence efficient price discovery
  • Speculation and arbitrage opportunities that require no mandatory holding of physical silver by the trader, yet offer the opportunity to benefit from price differentials
  • Taking short positions, both for hedging and trading purposes
  • Sufficiently long hours for trading (up to 22 hours for silver futures), giving ample opportunities to trade

Market Participants in the Silver Futures Market

Silver has been an established precious metal in dual streams:

• It is a precious metal for investment

• It has industrial and commercial uses in many products

This makes silver a commodity of high interest for a variety of market participants who actively trade silver futures for hedging or price protection. The major players in the silver futures market include:

Trading Gold and Silver Futures Contracts

Gold and silver futures contracts can offer a hedge against inflation, a speculative play, an alternative investment class or a commercial hedge for investors seeking opportunities outside of traditional equity and fixed income securities.

In this article, we’ll cover the basics of gold and silver futures contracts and how they are traded, but be forewarned: trading in this market involves substantial risk, which could be a larger factor than their upside return profiles.

Key Takeaways

  • Investors looking to add gold and silver to their portfolio may want to consider futures contracts.
  • With futures, you don’t need to actually hold physical metal and you can leverage your purchasing power.
  • Holding futures has no management fees that might be associated with ETFs or mutual funds, and taxes are split between short-term and long-term capital gains.
  • You will, however, need to roll your futures positions over as they expire, otherwise you can expect delivery of physical gold.

What Are Precious Metals Futures Contracts?

A precious metals futures contract is a legally binding agreement for delivery of gold or silver at an agreed-upon price in the future. A futures exchange standardizes the contracts as to the quantity, quality, time, and place of delivery. Only the price is variable.

Hedgers use these contracts as a way to manage price risk on an expected purchase or sale of the physical metal. Futures also provide speculators with an opportunity to participate in the markets without any physical backing.

Two different positions can be taken: a long (buy) position is an obligation to accept delivery of the physical metal, while a short (sell) position is the obligation to make delivery. The great majority of futures contracts are offset before the delivery date. For example, this occurs when an investor with a long position initiates a short position in the same contract, effectively eliminating the original long position.

Advantages of Futures Contracts

Trading futures contracts offers more financial leverage, flexibility, and financial integrity than trading the commodities themselves because they trade at centralized exchanges.

Financial leverage is the ability to trade and manage a high market value product with a fraction of the total value. Trading futures contracts is done with a performance margin, which requires considerably less capital than the physical market. The leverage provides speculators with a higher risk/higher return investment profile.

For example, one futures contract for gold controls 100 troy ounces, or one brick of gold. The dollar value of this contract is 100 times the market price for one ounce of gold. If the market is trading at $600 per ounce, the value of the contract is $60,000 ($600 x 100 ounces). Based on exchange margin rules, the margin required to control one contract is only $4,050. So for $4,050, one can control $60,000 worth of gold. As an investor, this gives you the ability to leverage $1 to control roughly $15.

In the futures markets, it is just as easy to initiate a short position as a long position, giving participants a great amount of flexibility. This flexibility provides hedgers with an ability to protect their physical positions and for speculators to take positions based on market expectations.

Gold and silver futures exchanges offer no counterparty risks to participants; this is ensured by the exchanges’ clearing services. The exchange acts as a buyer to every seller and vice versa, decreasing the risk should either party default on its responsibilities.

Futures Contract Specifications

There are a few different gold contracts traded on U.S. exchanges: one at COMEX and two at eCBOT. There is a 100-troy-ounce contract that is traded at both exchanges, and a mini contract (33.2 troy ounces) traded only at eCBOT.

Silver also has two contracts trading at eCBOT and one at COMEX. The “big” contract is for 5,000 ounces, which is traded at both exchanges, while eCBOT has a mini for 1,000 ounces.

Gold Futures

Gold is traded in dollars and cents per ounce. For example, when gold is trading at $600 per ounce, the contract has a value of $60,000 ($600 x 100 ounces). A trader that is long at $600 and sells at $610 will make $1,000 ($610 – $600 = $10 profit; $10 x 100 ounces = $1,000). Conversely, a trader who is long at $600 and sells at $590 will lose $1,000.

The minimum price movement, or tick size, is 10 cents. The market may have a wide range, but it must move in increments of at least 10 cents.

Both eCBOT and COMEX specify delivery to New York area vaults. These vaults are subject to change by the exchange. The most active months traded (according to volume and open interest) are February, April, June, August, October, and December.

To maintain an orderly market, these exchanges will set position limits. A position limit is the maximum number of contracts a single participant can hold. There are different position limits for hedgers and speculators.

Silver Futures

Silver is traded in dollars and cents per ounce like gold. For example, if silver is trading at $10 per ounce, the “big” contract has a value of $50,000 (5,000 ounces x $10 per ounce), while the mini would be $10,000 (1,000 ounces x $10 per ounce).

The tick size is $0.001 per ounce, which equates to $5 per big contract and $1 for the mini contract. The market may not trade in a smaller increment, but it can trade larger multiples, like pennies.

Like gold, the delivery requirements for both exchanges specify vaults in the New York area. The most active months for delivery (according to volume and open interests) are March, May, July, September, and December. Silver, too, has position limits set by the exchanges.

Hedgers and Speculators in the Futures Market

The primary function of any futures market is to provide a centralized marketplace for those who have an interest in buying or selling physical commodities at some time in the future. The metal futures market helps hedgers reduce the risk associated with adverse price movements in the cash market. Examples of hedgers include bank vaults, mines, manufacturers, and jewelers.

Hedgers take a position in the market that is the opposite of their physical position. Due to the price correlation between futures and the spot market, a gain in one market can offset losses in the other. For example, a jeweler who is fearful that they will pay higher prices for gold or silver would then buy a contract to lock in a guaranteed price. If the market price for gold or silver goes up, they will have to pay higher prices for gold/silver.

However, because the jeweler took a long position in the futures markets, they could have made money on the futures contract, which would offset the increase in the cost of purchasing the gold/silver. If the cash price for gold or silver and the futures prices each went down, the hedger would lose on her futures positions but would pay less when buying her gold or silver in the cash market.

Unlike hedgers, speculators have no interest in taking delivery, but instead, try to profit by assuming market risk. Speculators include individual investors, hedge funds, or commodity trading advisors (CTAs).

Speculators come in all shapes and sizes and can be in the market for different periods of time. Those who are in and out of the market frequently in a session are called scalpers. A day trader holds a position for longer than a scalper does, but usually not overnight. A position trader holds for multiple sessions. All speculators need to be aware that if a market moves in the opposite direction, the position can result in losses.

The Bottom Line

Whether you are a hedger or a speculator, it’s crucial to remember that trading involves substantial risk and is not suitable for everyone. Although there can be significant profits for those who get involved in trading futures on gold and silver, keep in mind that futures trading is best left to traders who have the expertise needed to succeed in these markets.

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