How To Trade Silver Futures: A Quick Guide



Silver is the second most-invested precious metal after gold. Silver has been used as currency, for jewelry, and as a long-term investment choice for ages. There are several silver-based products accessible for trade and investing today. These include silver futures, silver options, silver ETFs, and over-the-counter products such as silver-based mutual funds. This article describes silver futures trading, including how it operates, how investors commonly utilize it, and what you must know prior to investing.


The Basics

To illustrate the fundamentals of silver futures trading online, consider a maker of silver medals who has been awarded the contract to deliver silver medals for an upcoming sporting event. Within six months, the factory will need 1,000 ounces of silver to produce the necessary medals. He examines the silver price and discovers that it is currently $10 per ounce. The manufacturer may not be able to obtain silver at this time because to a lack of funds, secure storage issues, or other factors. Obviously, he is concerned about the possibility of a silver price increase within the next six months. He desires to prevent future price increases and wants to lock the purchase price at about $10. The manufacturer may fix some of his concerns by entering into a silver futures contract. The contract may be set to expire in six months, granting the manufacturer the right to purchase silver at $10 per ounce at that time. Buying a futures contract (having a long position) enables him to lock in the future price.

In contrast, the owner of a silver mine anticipates that her mine will yield 1,000 ounces of silver in six months. She is concerned about the silver price falling below $10 per ounce. The owner of the silver mine can profit by selling (shorting) the aforementioned silver futures contract available today at $10.1. It ensures that she will be able to sell her silver at the specified price.

Assume that both parties agree on a set price of $10 per ounce for a silver futures contract. Depending on the spot price (current market price or CMP) of silver at the contract’s expiration six months later, the following outcomes are possible. We shall explore some potential possibilities.

In each of the aforementioned instances, both the buyer and seller are able to purchase and sell silver at the prices they wish.

This is a classic illustration of hedging, in which price protection and risk management are achieved through the use of silver futures contracts. The majority of futures trades are conducted for hedging purposes. Moreover, speculation and arbitrage are the other two trading activities that maintain the liquidity of the silver futures market. Speculators take time-bound long/short positions in silver futures to profit from anticipated price moves, whilst arbitrageurs seek to capitalize on short-term price differentials.

Real World Silver Futures Trading

Although the above scenario is a fair illustration of silver futures trading and hedging, silver trading today in the real world is quite different. Contracts for future delivery of silver are available for trade on several exchanges across the world with standardized parameters. Let’s examine how silver is traded online in Dubai on the Comex Exchange (a Chicago Mercantile Exchange (CME) group exchange). The Comex Exchange provides three types of basic silver futures contracts based on the number of troy ounces of silver (1 troy ounce is 31.1 grams).

  • full (5,000 troy ounces of silver)
  • E-mini (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 a total contract value of $15.7 x 5,000 = $78,500.

Leverage is offered for futures trading (i.e., it allows a trader to take a position that is multiple times the amount of the available capital). 6 A complete contract for silver futures requires a set price margin of $12,375. To take one position in a whole silver futures contract, one just has to maintain a margin of $12,375, as opposed to the real cost of $78,500 in the preceding example.

Since the full futures contract margin of $12,375 may still be too costly for some traders, E-mini and micro contracts are offered with lesser margins in proportional amounts. The E-mini contract has a margin of $6,187.50, while the micro agreement requires a margin of $2,475.

Each contract is backed by refined physical silver (bars) tested for 0.9999 purity and stamped and serialized by an exchange-listed and certified refiner.

Settlement Process for Silver Futures

The majority of traders (particularly short-term traders) are often unconcerned about delivery techniques. Prior to expiration, they close off their long/short bets in online trading in silver and profit from cash settlement.

Those who maintain their holdings until expiration will either get or deliver a 5,000-oz COMEX silver warrant for a full-size silver future based on their long or short futures positions, respectively. One warrant grants the possessor the ownership of silver bars in the approved depositories.

In the case of E-mini (2,500-ounce) and micro (1,000-ounce) contracts, the trader obtains or deposits an Accumulated Certificate of Exchange (ACE), which reflects 50% and 20% ownership of a standard full-size silver warrant, respectively. The holder may amass ACEs (two for E-mini or five for micro) in order to acquire a 5,000-ounce COMEX silver warrant.


Role of the Exchange in Silver Futures Trading

Silver forward transactions have existed for ages. 10 In its most basic form, it consists of two parties agreeing on a future price of silver and pledging to complete the deal by a specified date. Nonetheless, forward trading is not typical. Therefore, it is fraught with counterparty default risk.

Dealing online silver trading platform through an exchange provides the following:

  • Standardization for commercial goods (like the size designations of full, E-mini, or micro silver contracts)
  • A safe and regulated platform for buyer and seller interactions.
  • Coverage against counterparty risk
  • An effective pricing discovery system
  • Future date listing for 60-month ahead dates, allowing the construction of a forward price curve and efficient price discovery.
  • Speculation and arbitrage opportunities that do not need the trader to have real silver but give the chance to profit from price differentials.
  • Taking short positions for hedging as well as trading
  • Sufficiently extended trading hours (up to 22 hours for silver futures), providing adequate trading opportunities.

Market Participants in the Silver Futures Market

Silver is a well-established precious metal in two distinct areas: 

As an investment metal and a component in several industrial and commercial items.

This makes silver a highly sought-after commodity among market players who actively trade silver online in Dubai for hedging and price protection. Major participants in the silver futures market include:

  • the mining sector 
  • refineries
  • electrical and electronics industries
  • photography companies
  • jewelry businesses
  • the car industry
  • makers of solar energy equipment

The aforementioned participants trade silver futures primarily for hedging purposes, with the goals of price protection and risk management.

The finance industry is an additional source of large participants in silver futures markets. These participants may also be interested in speculation and arbitrage opportunities:

  • Banks
  • Hedge funds and mutual funds
  • Private trading businesses
  • Market makers and individual traders

Factors Affecting Silver Futures Prices

In the past several years, silver prices have seen extremely high levels of volatility, this is caused of sell silver online perhaps pushing silver beyond the widely recognized bounds of safe asset classes. 12 This makes silver a very volatile commodity.

Industrial demand for silver accounted for around 39 percent of overall demand around 1990. The remaining was used for investments. Currently, industrial demand accounts for more than fifty percent of total demand. 13 This rising industrial demand is the major cause of increased silver price volatility. A recession or slowdown in industrial demand would reduce the price of silver.

On the other hand, several circumstances might raise silver’s demand and lead to higher prices. The rise of the electronics and car industries would increase silver’s demand. Increasing oil costs might raise silver demand by compelling the adoption of alternative energy sources, such as solar. Solar energy equipment utilizes silver. To attempt to forecast the future price of silver, investors should consider the following:

Examine estimated and actual mine output on the supply side, focusing on key silver-producing nations such as Mexico, China, and Peru.

Follow both the industrial and investment demand for silver on the demand side.

In macroeconomics, one must consider the national or global economy as a whole. Examine the relative performance of various investment channels, such as gold, the stock market, and oil, among others.

The Bottom Line

In recent years, silver has been a very volatile commodity, making it a high-risk investment. In addition to variables impacting the price of real silver sold online, silver futures trading is also affected by contango and backwardation phenomena unique to futures trading. Futures trading involves daily mark-to-market fulfillment in the real world. Traders should be aware of this and invest adequate cash in it. Although leveraged E-mini and micro silver futures contracts are offered in tiny sizes, the trading capital requirements for ordinary traders can still be substantial. Trading silver online futures is only recommended for experienced traders with relevant futures trading skills.

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