The Investing News Network takes a look at silver futures, what they are, where they are traded and what their benefits are.
Affected by mine production, industrial demand and the global economy, the price of silver can be volatile beyond what some consider a comfortable amount of risk.
With that in mind, there are different ways to invest in silver. In particular, silver futures is a common–and popular–strategy for those who are comfortable or advanced in the market.
For those newer to silver futures investing, it should be noted that that trading in silver futures is not the same as owning the physical metal.So what are silver futures, and what are the benefits of adding them to your portfolio?
What are silver futures?
Much like gold, silver futures is an agreement between a buyer and a seller where silver will be paid for and delivered at a date set in the future.
Most traders (especially short term traders) usually aren’t concerned about delivery in silver futures. They settle their long or short positions before expiry and benefit with a cash settlement. Approximately 1 percent of silver futures contracts traded each year result in delivery of the underlying commodities.
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 if they are the buyer or the seller. One warrant entitles the holder the ownership of equivalent bars of silver in the designated depositories including Brinks, HSBC, Bank USA, Manfra Tordella & Brookes, Scotia Mocatta, Delaware Depository Service Company, and J.P. Morgan Chase.
What markets are futures traded on?
In the US, silver futures are purchased at exchanges, most notably at the New York Mercantile Exchange (NYMEX) through its Commodity Exchange (COMEX) division.
COMEX Division’s contract months are conducted for delivery during the current calendar month, the following two calendar months, January, March, May, and September that are within a 23-month period. July and December are also included, should they fall within a 60-month period, beginning with the current month.
Options are traded for the nearest five of the following contract months: March, May, July, September, and December. January, February, April, June, August, October, and November are listed for trading for a two-month period. If there weren’t already enough options, a 24-month period is added on a July to December cycle, and can be can be exercised at any time up to expiration.
Silver futures at COMEX are traded in units of 1,000, 2,500 and 5,000 troy ounces and are quoted in US dollars per troy ounce. For example, a price quote of $14 for 5,000 troy ounces would cost approximately $70,000.
Silver futures are also traded electronically through the Chicago Board of Trade (eCBOT), the Indian National Commodity and Derivatives Exchange (NCDEX), Dubai Gold and Commodities Exchange (DGCX), Multi Commodity Exchange (MCX) and Tokyo Commodity Exchange (TOCOM). TOCOM silver futures are traded in 30000 grams (964.53 troy ounces) at a price of yen per gram.
There’s more options on the way, though. By 2017, silver–and gold–futures are expected launch on the London Metal Exchange (LME).
Why Silver Futures?
Silver typically follows in the footsteps of gold. What that means is it’s considered a safe-haven asset for several reasons. Investors typically flock to the precious metal under pressure of the US dollar, which bumps up demand for gold and silver. That being said, if gold is too expensive, silver is a cheaper option for investors still looking to get into the space.
Futures also offer a limit of potential loss to the buyer, which attracts potential hedgers. Hedgers such as producers, portfolio managers or consumers often use futures to mitigate price risk, protect themselves from inflation, and reap the rewards from favorable price movements. On the other hand, speculative investors can use silver futures to gain exposure to silver while only putting up a fraction of the total cost for the contract.
It should be said that futures also have the equal potential to suffer large losses. Due to the leverage involved, an investor can lose funds in their account quickly. However, by using options in combination with futures contracts, investors may be able to control their desired risk profile, time horizon, or cost consideration.
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