The Investing News Network takes a look at silver futures, including what they are, where they’re traded and the benefits for investors.
Investing in silver futures is one of many options for those interested in taking advantage of price gains in the silver market.
The highest price for silver to date was reached half a century ago, when the precious metal hit US$48.70 per ounce. In recent years, investors have been wondering when will the silver price go up, and if it will it ever break past its record.
Some silver bulls believe that could happen in the near future, with a few market insiders even calling for a silver price as high as US$130.
Trading silver futures is not the same as owning physical metal, but it’s a popular strategy for advanced investors with a higher risk tolerance. So what are silver futures, and what are the benefits of adding them to your portfolio? Read on to learn more about the market and how to get involved.
What are silver futures?
Silver futures involve an agreement between a buyer and a seller in which physical silver will be bought by the seller and delivered by the buyer at a date set in the future.
Most traders (especially short-term traders) aren’t concerned about delivery when it comes to silver futures — they typically use cash to settle their long or short positions before they expire or defer them to the next available delivery month. Overall, very few silver futures contracts traded each year actually result in the delivery of the underlying commodity.
What exchanges are futures traded on?
In the US, silver futures are purchased via exchanges, most notably through the Commodity Exchange (COMEX) division of the New York Mercantile Exchange (NYMEX).
On the COMEX, trading is conducted for delivery during the current calendar month or the following two calendar months, plus any January, March, May or September within a 23 month period. July and December are also included should they fall within a 60 month period, beginning with the current month.
Silver futures on the COMEX are traded in units of 1,000 (known as micro contracts), 2,500 (E-mini contracts) and 5,000 (full contracts) troy ounces, and are quoted in US dollars per troy ounce. For example, a price quote of US$14 for 5,000 troy ounces would cost approximately US$70,000.
Investors who wait for their silver futures to mature will either receive or deliver a 5,000 troy ounce COMEX silver warrant for a full-sized silver future, depending on if they are the buyer or the seller. One warrant entitles the holder to ownership of equivalent bars of silver in designated depositories, including Brink’s Company (NYSE:BCO), HSBC Holdings (NYSE:HSBC,LSE:HSBA), Manfra Tordella & Brookes, ScotiaMocatta, Delaware Depository and JPMorgan Chase & Co. (NYSE:JPM).
The COMEX settlement process is different for smaller silver futures contracts.
Silver futures are also traded electronically through CME Group, the Indian National Commodity & Derivatives Exchange (NCDEX), the Dubai Gold & Commodities Exchange (DGCX), the Multi Commodity Exchange of India (MCX) and the Tokyo Commodity Exchange (TOCOM).
More precious metals futures options are offered by the London Metal Exchange (LME). According to the LME website, “LMEprecious provides a real-time five-year forward curve and intra-day reference prices for the market, which can be accessed free via LMElive.” LME gold and LME silver futures are based on loco London precious metals products and are offered in daily and monthly futures contracts.
Why silver futures?
Silver typically follows in the footsteps of gold, and is also considered a safe-haven asset. Investors typically flock to precious metal in times of turmoil, which bumps up demand, and if gold is too expensive silver is a cheaper option for those looking to get into the space.
Futures offer a limit on potential losses to buyers, which attracts potential hedgers. Hedgers such as producers, portfolio managers and consumers often use futures to mitigate price risk, to protect themselves from inflation and to reap the rewards of favorable price movements.
On the flip side, speculative investors can use silver futures to gain exposure to the white metal while only putting up a fraction of the total cost for a contract.
Of course, silver has equal potential to suffer large losses in the futures market — due to the leverage involved, investors can lose funds in their accounts quickly. For that reason, experts often encourage inexperienced market participants to avoid the futures market until they have a good idea of their desired risk profile, time horizon and cost consideration.
This is an updated version of an article first published by the Investing News Network in 2016.
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Securities Disclosure: I, Melissa Pistilli, hold no direct investment interest in any company mentioned in this article.