Silver Trading Basics

Investing in the Silver Market

Silver has often been called the poor man’s gold, taking a back seat to gold when traders looked for a safe-haven investment. Silver is considered a precious metal but not as rare as gold. While silver prices have always been far below the value placed on gold, prices of the two metals have generally tracked together as the factors that affect gold also tend to affect silver. Silver, however, has a wider range of uses and is priced for its industrial uses in electronics, photography, jewelry and elsewhere in addition to its financial role, increasing its significance for an investment portfolio.

Like gold, there are a number of vehicles for investing in silver in addition to silver futures and options. Those who choose to invest in physical silver can buy silver bullion, silver coins, silver medallions or silver certificates backed by silver in vaults.

Silver traders who prefer to express their interest in silver prices through stocks can invest in mining companies including penny stocks or in silver exchange-traded funds.

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Silver Trading Information

Like gold, silver is traded at a number of exchanges around the world, including Sydney, Tokyo, Dubai and the world’s major silver futures exchange, the Comex division of the New York Mercantile Exchange (NYMEX).
  • The full-size NYMEX silver futures contract is 5,000 troy ounces of refined silver, not less than .999 fineness, in cast bars weighing 1,000 or 1,100 troy ounces each.
  • Contract months are the next two calendar months, any January, March, May and September within a 23-month period and any July and December falling within a 60-month period beginning with the current month.
  • Silver Prices are quoted in dollars per ounce, with the minimum price fluctuation one-half cent per ounce or $25 per contract.
  • Straddles or spreads are traded in tenths of a cent, equivalent to $5 per contract.
NYMEX also trades a half-size miNY silver futures contract. However, activity has been limited and may not be liquid enough for active traders.

A report on silver warehouse stocks provides a daily amount of silver inventory on hand for possible delivery on futures contracts. A decrease in inventories can provide support for silver prices to move higher.

Another venue for trading silver futures is NYSE Euronext, which purchased the metals complex including mini- and full-size silver futures contracts that were traded at the Chicago Board of Trade prior to the CBOTs merger into CME Group.

Silver Trading Fundamentals

Newly mined metal provides most of the needed supply of silver, with much of it coming as a byproduct from mining for other metals. About 75 percent of the worlds annual supply of silver comes from mining production, with the remainder coming from government sales of silver stocks and from recycled scrap, including what is termed dishoarding as silver coins, jewelry and other silver products are melted down.

Future silver prices depend directly on this supply.  In 2008, 20,900 metric tons of silver were mined in the world.  The overwhelming leader in mine production by region was Central and South America.  Peru, Mexico, and Chile alone combined to produce 8,600 metric tons of silver, or 41% of global silver production.  Individually, the global leaders in silver mine production as a percent of global production are as follows: Peru (17%), Mexico (14%), China (12%) and Chile (9.5%).  Production is only one of the factors affecting the future silver price.  The second factor is the demand.  There are many uses for silver other than jewelry.

On the demand side, about 54 percent of the world’s supply of silver is used in industrial applications, including a variety of uses in the electrical and electronic sector. Until 2005, the single largest demand for industrial or commercial use came from the photography industry.  Currently, 15% of fabricated silver is used for photography.  In the past 10 years, demand from the photography industry has been almost cut in half resulting in the decline of silver’s percentage of overall demand from 27% to its current level of 15%.  The jewelry market surpassed photography as the leading consumer of silver in 2005.  The reason for this decline has been the increasing use of digital cameras.  This has been, and will most likely continue to be a growing trend affecting the future silver market. 

Even with the decline in photography demand for fabricated silver, overall demand has held relatively steady.  Making up the slack has been the growth in fabricated demand from industrial applications other than photography.  These industrial applications include: batteries, bearings, soldering, catalysts, medical, solar energy, and other electronics.  Demand for these industrial applications has grown by 45% and now makes up almost 55% of fabricated silver demand.  That compares to the 38% figure of 1998.

Other uses for silver include coins, medals, and silverware.  These three sectors round out demand and make up 11% of total fabricated demand.  Many people are surprised to hear how much of the silver demand goes towards uses other than implied investments by private and government interests.  Silver is classified as a precious metal, but that doesn’t mean it can’t be used for industrial and commercial purposes.  As you can see, that really couldn’t be less true.  Understanding silver’s uses and leading suppliers is an important part of trading future silver markets.

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Silver Trading Tips

If you trade silver, you want to watch gold and anything that influences gold prices as the two markets tend to move together. Particularly important for the prices of both precious metals are the government economic reports such as quarterly gross domestic product, monthly Consumer Price Index and Producer Price Index figures that measure the inflation rate and any other reports that reflect the country’s economic growth. Economic reports from other nations can also provide clues about silver demand.

Watch the spread between the gold and silver prices to move to one extreme or the other and expect it to come back to normal, buying silver and selling gold at the high end of the spread, for example.

Silver is an excellent commodity to have on hand if you are expecting high inflation and/or chaotic economic conditions because silvers lower values provide more flexibility for purchasing smaller items. For that reason, some people prefer to hold silver coins.

Be careful when holding silver futures overnight. In the volatile market conditions that have marked silver trading in recent years, the price of silver can make big moves from one day to the next. An unexpected crisis can occur at any time anywhere in the world, causing traders to look to the gold or silver markets to preserve their wealth. It is not uncommon for silver prices to open 20 or 30 cents higher or lower than the previous day’s close $1,000-$1,500 per contract and silver futures have been known to move $1 or even $2 intraday $5,000 to $10,000 per contract. That’s hardly a poor man’s contract.

Silver ETFs

ETFs (Exchange Traded Funds) have become highly popular in the last two decades. They give you the benefits of both stocks as well as mutual funds. Now, you can find many ETFs tracking a basket of commodities. You can find Gold ETFs as well as Silver ETFs. The most popular one is the iShares Silver Trust Fund that is managed by the Barclays Bank. The bank holds the silver bullions in its vault. This ETF tracks the spot price of silver. So by investing in this ETF, you can profit from the silver price volatility. However, right now there might not be many ETFs that solely track this commodity. As the demand for silver increases and its price skyrocket, you will soon find many new ETFs tracking this precious metal.

Silver CFDs

Many people are learning how to trade silver using contracts for difference (CFD), as this is a convenient way to profit from an increase in price without the headaches of storing the physical metal. Silver is particularly interesting for the trader, as it differs from gold in a couple of respects. Nearly as much gold as has ever been found is still in existence in the world in the form of jewelry and other items; whereas there is very little silver left of what has been mined, as it gets used up in many different industrial processes.

When you use contracts for difference to trade silver, you will find that it is extremely efficient. The margin requirement, the amount you have to put up to enter a trade, can be as little as 0.5%, giving you the leverage of 200 to 1 on your money. In the futures market, another way to trade on commodities, you may only get a leverage of 25 to 1, which makes the CFD far more effective.

Depending on your CFD broker, you may be able to trade on the spot price of silver, that is the current price, or you can also take out a contract on the price on a future date. Using CFDs it is as easy to profit from a fall in value as from a rise, so you are also able to make money during periods of price consolidation. Your chief cost of trading is in the spread, which makes it easy to understand.

Say for example that you wanted to take out a contract for difference for a long position in silver anticipating that the price will increase. You may be quoted 20.44 -- 20.49. The lot size may be 500 ounces, and one advantage of using CFDs is that you're not restricted to the lot sizes offered on standard futures contracts. One long contract on 500 ounces would be worth $10,245, so the margin requirement could be as little as $50, depending on your broker.

If the price now goes up to 20.72 -- 20.77 and you close the position, your points gain from 20.49 to 20.72 is 23. The value of the contract has gone up to $10,360, an increase of $115 for a modest gain in price on a margin of $50. Of course, leverage can work against you, and if the price had fallen you could be facing a margin call from your broker to make up your losses. Therefore it's important that you take time to educate yourself about CFDs, and make sure that you cut your losses whenever it becomes apparent that you don't have a winning position.

Silver Trading Resources

There are multiple sources for finding news and information about purchasing silver as an investment or trading silver for profit opportunities. Most major newspapers and other financial news sources that cover metals report the pricing and sales of silver. Government sources, exchanges and brokerage firms all offer many resources for silver traders.

One of the major sources of information is The Silver Institute, an international association of miners, refiners, fabricators, and wholesalers of silver and silver products established in 1971 to promote the interests of silver worldwide.

Silver Trading History

Civilizations have been using silver going back 6,000 years, as silver deposits were on or near the earth’s surface, and the durable, malleable metal was used for jewelry and other artifacts that have been recovered. Mesopotamian merchants used silver as a form of exchange as early as 700 B.C., and the ancient Greek drachma and Roman denarius coins were made from silver. And then there is the English shilling "sterling," originally denoting a specific weight of silver, which has come to mean excellence.

Silver played an important role in the early days of the United States when Congress based the currency on the silver dollar and its fixed relationship to gold. Silver was used in U.S. coinage until being discontinued in 1965.

Silver gained a more important economic function as an industrial raw material at the beginning of the 20th century as new processes for photography, jewelry and electronics began to develop.

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