Silver has been considered a precious material since the dawn of time with its unique white hue and mesmerizing shine. Although no longer used as a medium of exchange for goods and services, it’s still praised for its high electrical and thermal conductivity, which makes it an indispensable material in the electronics industry.
However, most people are primarily interested in its ability to store value and be traded. While silver is still readily traded in the cash market, for example, by jewelers and manufacturers, investing in silver futures helps mitigate the risk that comes with price fluctuations. Others may simply dabble in futures as an alternative to short term investments in hopes of making profits, never actually owning the underlying asset and taking delivery of it after the contract has expired.
Before we take it further, let’s go over some basic facts about the futures market, how silver futures work, the different types of investors, and see how you can start building your investment portfolio.
A brief look at futures contracts
Assets like precious metals, silver, in particular, can see significant price movements over time, and futures contracts are merely a way for buyers or sellers to reduce the risk associated with these fluctuations.
Silver futures are legal contracts stating that a person will buy or sell a set amount of silver at a specific future date, or at least within a span of a specified month. These standardized contracts can be traded on different exchanges, making it quick and easy for everyone from manufacturers and trading companies to private investors to buy and sell silver.
Below, we’ll take a look at how silver futures are used by different investors, the different strategies involved, and the benefits and risks associated with each.
The different types of investors
There are two essential categories of investors interested in silver futures, and both can involve large companies, smaller businesses, or even individual traders.
As the name suggests, these companies want to “hedge their bets”, so to speak, when buying or selling silver as an actual physical commodity. Usually these can be, silver mines and refineries, jewelers, car manufacturers, and businesses specialized in consumer electronics or solar-powered equipment.
The hegders’ preferred strategy is to take the long position or in other words buy the asset by locking in its current price. For example, an electronics company determines that it will need another 5.000 troy ounces of silver in 4–5 months to produce an upcoming product line.
With the current price of silver, they would be under budget and make a higher profit. However, if the company waits and buys the silver in 5 months, the price will have changed, and it risks a lower profit margin. By getting a silver futures contract that expires in five months, they lock in the current price and know exactly what they will be paying, thus avoiding the risk of any price change in the future.
On the other side of the coin, we have those interested in speculating on the price changes in silver, buying and selling silver futures to make a profit without ever waiting for a futures contract to expire, and taking delivery of the physical commodity. These include individual traders, trading firms, hedge funds, and banks.
Among speculators, there are several subcategories based on the strategy they use, which often comes down to how often they buy and sell silver futures. They can most commonly be divided into:
- Day trader – This refers to someone who takes advantage of the daily price fluctuation in the futures market with the goal of making profit. Their aim is to buy and sell futures contracts within the same day and as many times as their strategies allow. They close all positions that are opened on the same day. Some of the most common strategies they employ are scalping, arbitraging , and range trading.
- Swing trader – This refers to someone who holds on to their futures positions for a few days, weeks, or even a month or two with the aim of capturing a greater portion of the overall market trend. Their positions are usually executed based on longer term timeframes and as such does not require them to actively manage them. Swing traders are exposed to overnight and weekend risk where the price of the instrument could fluctuate significantly and may cause losses if not properly managed.
These are but a few of the strategies that a silver futures individual trader can master while learning how to trade.. There is a lot more to it, of course, and one must ensure he has acquired adequate knowledge and sufficient skill in order to be able to develop a solid trading strategy before jumping into the deep end of trading futures. With that in mind, let’s go over the finer details of silver futures contracts and the exchanges they are traded on.
The ins and outs of silver futures
The biggest appeal of trading silver futures is that you can do so at basically any time of day for six days each week. It offers great flexibility, but it is also highly volatile, with potentially large differences between the spot and futures contract prices.
While more experienced traders, particularly those using the scalping strategy, can take advantage of this volatility, it may be a more significant challenge for new investors. Let’s take a look at the main exchanges where you can trade silver futures and some basic specifications of the standardized futures contracts.
Where to trade
There are several exchanges where it’s possible to trade silver futures contracts, most notably NYMEX (New York Mercantile Exchange), through its COMEX division, and TOCOM (Tokyo Commodity Exchange). The COMEX Division of NYMEX is open 23 hours – with a 1-hour break from 4PM to 5PM Central Time (CT)– every day of the week except Saturday.
You can trade commodity futures on TOCOM from 8:45AM JST to 3:5PM JST from 4:30PM JST to 5:30PM JST business days.
Basic contract specs
The size of the full contract for silver futures on the NYMEX is 5,000 troy ounces, with an initial margin set at $6400. There are also E-mini contracts for 2,500 troy ounces and a micro contract for 1,000 troy ounces. The minimum price fluctuation for the full contract is $25 (0.005 per troy ounce), and these are all contract specifications for pure silver of minimum 99.99% fineness.
On the TOCOM, the contract unit is 10 kg (321.51 troy ounces), but the delivery unit contains 3 contract units, i.e. 30 kg (964.53 troy ounces). The minimum price fluctuation per contract unit is ¥1,000 (¥0.1 per gram), equating to ¥3000 for the whole delivery unit.
Silver futures are standardized contracts that manufacturers, jewelers, mines, banks, and individual investors can trade on select exchanges. The good news is that you can trade them almost everyday either by being a hedger to minimise the risk associated with price fluctuations or merely a speculator profiting from the short term price swings of silver futures.
If you are new to trading futures, we hope that we have provided you with some answers and given you a push in the right direction.