How to invest in Silver Futures?

By Altay Gursel | February 23, 2021
Home / Precious Metals / How to invest in Silver Futures?

All To Know Investing In Silver Futures

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In an era like this, where investors are seriously looking out for alternative advantageous investments to hedge against inflation or to diversify their portfolios by investing outside of traditional equity and fixed income securities, you shouldn’t be left in the dark.

That said, if you are considering investing in silver futures contracts, you should read through this article carefully.

Gold and silver have always been at the topmost positions, respectively, when you walk about precious metals and futures contracts.

Silver is the second most popular precious metal commodity just behind Gold. Investing in silver futures can offer quite a lot of benefits and gains; however, the futures market is substantially risky; you need to know a lot of things before proceeding to invest.

Interestingly, this article covers extensive tips and handy information you need to know about trading and investing in silvers futures.

Quick Summary: Silver futures is best traded with exchanges to curtail counterparty risk. Silver itself is highly volatile; hence, it poses more risk. However, investing in silver futures can make you a lot of profit within a specified period.

This type of investment is best recommended for expert traders who have been trading in the futures market. This article is a “long read,” relax and read through the lines to devour the several tips we’ve provided.

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What is Silver Futures?

Before we go on to silver futures investment; how it is done and all that you need to know, it’d be great to start with the very basic question, “What is Silver Futures?”

Simply put, silvers futures is a legally binding “contract,” or agreement, where involved parties agree to trade silver at a predetermined price at a particular time in the future.

This type of trading is mostly considered when the buyer or seller is looking to lockdown silver at a particular price to purchase it at a later time when it’s needed. To further understand silver future contracts, you need to understand what “Futures trading” is all about.

What is Futures Trading?

Let’s give a practical example to clearly explain “Futures Trading/Investment/Contract.” When the term “Future” is used, it’s simply referring to something that’d occur at a later time, probably in some months later or even years.

So, future trading refers to a trade or transaction that would take place at an agreed time, an agreed delivery point, and at an agreed price.

Here’s the example;

A company that manufactures silver products was contracted to produce a certain number of silver products for an event that’d take place in eight- (8)-month time.

The manufacturer, after calculations, discovered that it needs around 2,000 ounces of silver to deliver the contract in eight months. However, at that moment, silver sells at $10 per ounce, which means that the manufacturer would spend about $20,000 to purchase 2,000 ounces of silver for the contract.

But, for some reasons, the manufacturer won’t be able to make the purchase immediately, and owning to the fact that the market price for silver may likely skyrocket in the coming months, the manufacturer may decide to go into a “Silver Future Contract” to lock the required amount of silver (2,000) to buy it at $10 even after eight months, regardless of the current market price.

To achieve a futures contract, there have to be two different positions: long (buy) position and short (sell) obligation.

The buyer takes a long position; this is an obligation to accept delivery of the specified amount of silver, while the seller takes a short position; an obligation to deliver the said amount of silver. However, future contracts can be offset before the actual delivery date, in some cases.

Continuing further with this article, it’d be great to mention and clarify some important terms relating to futures contracts (silver futures). Understanding these terms would help you a lot when you finally take the step towards investing in the “futures” market.

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Silver Futures Terms and Phrases for Investors

  • Hedge/Hedging: When you hear or see the word hedge/hedging in regards to silver futures investment, it simply refers to a variable strategy adopted by silver futures investors to checkmate the substantial risks in for trading future assets.
  • Future Contracts: this refers to financial contracts that compel the involved parties to trade an asset (it could be precious metals such as gold, silver, etc., or oil), at a predetermined price and future date. The buyer and the seller of the asset must make the transaction at the expiration of the “futures contract” regardless of market-based factors.
  • Speculation: This simply refers to the act of carrying out a financial deal that has significant risks of losing value but promises substantial gains.
  • Hedger: Hedgers in futures trading can include manufacturers, mines, bank vaults, and jewelers. They simply capture a position that is the opposite of their physical position in the market.
  • Speculators: As the name implies, these are the people who are selling the silver commodity or asset. They assume certain market risks and tend to short-sell their product, commodity, or asset in a bid to checkmate the assumed risks.
  • Exchange: Buyers and sellers of silver futures assets can enlist an exchange platform to aided support, transparency, and certainty.

Simply put, a “Hedger” is the buyer of the silver futures asset or commodity, while the “Speculator” is the seller of the contracted asset or commodity.

An “Exchange” is a platform that allows silver futures trading, providing transparent and standardized prices for both hedgers and speculators.

Advantages of Silver Futures Investment

Certainly, investors weigh the advantages (benefits) and disadvantages (risks) of a potential investment before going into it. For silver futures, here are the top advantages you’d gain from the contract.

1- Saves Money on Storage

Since the traded asset(s) is not delivered immediately, the buyer would not have to spend further in acquiring a storage facility to house the commodity until it is needed.

The delivery will only come through at the expiration of the contract; most probably, at that time, the asset or commodity would be needed immediately and there’s zero need to pay for storage. This is one of the biggest advantages of futures contracts.

2- Flexibility

After the contract is signed, the buyer can yet request an adjustment in certain aspects of the contract terms. However, adjustments can only go through when the involved parties concur.

3- High Liquidity

Silver futures markets offer high liquidity, allowing the investor or trader to join and exit the market at any time.

4- Less Worrisome

Getting into a silver futures contract would cause you to worry less about the fluctuating price of silver assets and commodities.

Risks and Disadvantages of Silver Futures Investment

There are two sides to every coin; when you look at the advantages of an investment, it is more important to consider the risks/disadvantages.

Value Depreciation

All futures contracts have an expiring date. Sometimes, as the expiring date draws near, the contracted assets may have already started losing their value in the market. Hence, when the buyer takes delivery of the future asset, its expected profits to be made may have dropped drastically.

How To Invest in Silver Futures

With much already said about “Futures contract” and “Silver futures” in this article, this section would be much easier to understand. Hereunder are the steps, requirements, and procedures to investing in “Futures Contract,” silver to be specific.

Find a Silver Futures Exchange

It is advisable to get an exchange for silver futures contracts. There are lots of exchanges that accept silver future trades, globally. Futures exchanges help standardize futures trading for everyone that’s involved, regardless of the number of participants.

These platforms (Futures exchanges) make profits based on the volume and monetary value of the traded future commodity or asset. It is safer and simpler to go with an exchange platform, the most common ones are the Chicago Mercantile Exchange (CME), the New York Mercantile Exchange (NYMEX), Comex Exchange, and quite others.

Silver futures that are contracted through a futures exchange guarantees that the seller of the underlying asset would receive the exact price for their products. On the other hand, the futures exchange provides the buyer with the exact price to pay at the specified time in the future.

Interestingly, exchanges do provide pricing information for transparency purposes. Usually, the pricing chart is dispersed by information vendor firms. The chart may include the standardized prices, bids, and offers. This can be accessed by anyone who’s interested in making investments in silver futures.

This is practically the safer way to invest in silver futures; you’d be relieved from a lot of stress and complex procedures as the exchange would take care of everything, as well as standardize the prices.

However, you must not trade with exchanges; there are some investors that prefer Over-The-Counter (OTC) contracts; where the buyer and seller have to legally agree to some bespoke terms and regulations.

Silver Futures Exchanges

These futures exchanges are trusted, reliable, and they make futures trading much easier, even to new investors in the market.

1. COMEX

Previously Commodity Exchange Inc., COMEX is a widely-known silver futures exchange; however, investors can also trade Gold, Aluminum, and Copper futures with this broker. Actually, the name COMEX was derived after the company merged with NYMEX to expand its offering to support metals trading.

Reports from the CME Group alleges that over 400,000 futures are validated on COMEX every day. Commodities traded with COMEX are available in regulated contract sizes. This broker is legit – COMEX operates from the World Financial Center in Manhattan; it is a subdivision of the Chicago Mercantile Exchange (CME).

It may interest you to know that COMEX doesn’t only provide futures trading services, the broker also Options trading and other services, too.

2. eCBOT

eCBOT is also a subdivision of the CME group. It is an electronic platform, or rather version, of the Chicago Board of Trade (CBOT) platform.

This electronic platform is available to hedgers and speculators; it provides traders with a virtual platform to speculate and hedge potential risks in the commodity futures markets, and other supported markets too.

e-CBOT is dully fully managed and operated by CBOT. It took over physical trading pits that were being used prior, providing more flexibility and the ability for traders to carry out actions from anywhere they are located. This platform is designed to be intuitive and provide a lot of resources for both speculators and hedgers.

Also, asides from silver futures, there are many other commodities that can be traded on E-CBOT. So, if you have intentions of investing in other futures, this exchange is a good one to go with.

3. TOCOM

Tokyo Commodity Exchange, TOCOM, is also one of the best exchange platforms to trade silver futures. The platform allows hedgers and speculators to key in and trade transparently – backed up by professional support service from the TOCOM team.

TOCOM is literally the biggest and most popular Japanese commodity futures exchange; it operates electronic markets (e-markets) for silver commodities and other precious metals commodities.

However, instead of dollars, as used by the aforementioned exchanges, TOCOM’s primary trading currency is YEN, and contract prices are quoted in yen per gram. The currency denomination may be a big hindrance, regardless, TOCOM is a reliable exchange for silver futures trading.

4. London Metal Exchange

London Metal Exchange (LME) provides futures exchange services for hedgers and speculators. Headquartered in UK, London, LME serves clients from virtually all-region and continents. It is mainly an industrial exchange platform – providing varieties in options and futures trading.

LME has gained solid reputation as a silver futures exchange; however, you need to conduct more research regarding their fees and terms. There are many other investment opportunities on LME, for investors that wish to diversify.

5. Multi-Commodity Exchange (MCX)

When looking for how to invest in silver features, MCX is one of the most popular exchanges that offer excellent support and transparency. The MCX was the number one silver trading exchange as of 2011.

This exchange provides two unique contracts and there are many commodities you can trade here, including oil, base materials, bullion, etc. MCX facilitates online silver futures trading, providing a viable platform for price discovery and risk management for hedgers and speculators.

These five (5) exchanges are the best choices for anyone who’s considering making an investment in silver features. Apparently, there are many other commodities you can trade on these exchanges.

What Actually Does Exchanges Do In Silver Futures Trading?

Traders could decide to do “Forward trading” and ditch exchanges, but the risks involved in the Forward Silver Features trade is more than the risk you may face when you go through an exchange.

When an exchange is engaged, the following are the roles to expect from the chosen exchange platform.

  1. The exchange provides standardized factors for trading silver futures. This can include the size designations of full, e-mini, or micro silver contracts.
  2. Counterparty risk protection
  3. Provision of a regulated and secure platform for the hedger and speculator to interact freely.
  4. A competent and reliable price discovery method
  5. To assume the short positions for hedging and trading purposes
  6. Provide unfaultable long hours for trading (let’s say 22 hours for silver futures trading) to give traders an ample opportunity to trade.

What’s Contained in a Typical Silver Futures Contract

These parameters do not only apply to silver futures only, they also apply to futures contracts in general. Notwithstanding the standardizations by the exchange helping you to invest in silver futures, a futures contract would need to specify these items:

  • The unit of measurement for the traded commodity
  • A clear indication of how the trade will be settled. This means to specify if the traded silver commodity would be physically delivered (the exact traded quantity), or the contract is going to end with a cash settlement.
  • The exact number of commodities covered in the contract and the exact quantity to be delivered, if there be a need for physical delivery.
  • Currency denomination for the contract; the currency in which the silver futures contract is quoted.

Other things may be included depending on the exchange’s terms of service for trading silver futures on its platform. In addition, always be mindful of storage before agreeing to take physical delivery at the expiration of the contract.

Random Important Notice

Normally, Silver trades in dollars and cents per ounce, just as gold. When silver sells at $10 per ounce, a contract of value $50,000 signifies 5,000 ounces of silver x $10, which is the price per ounce.

Possible Factors That Affect Silver Futures Pricing

Silver is a highly volatile tradable asset. In the past years, silver saw a lot of high levels of volatility, which likely contributed to pushing silver further than the generally alleged limits for safe asset classes.

There are quite many circumstances that could cause the demand for silver to increase, which can possibly lead to higher prices.

The possible factors that can influence the price of silver include:

  • Expansion of the electronics and automobile industry
  • When oil prices skyrocket, demand for alternative energy supply, solar, would increase and this could influence the price of silver – because solar systems and panels are typically made from silver.

If you want to predict the future prices of silver, you must need to consider these factors:

On the demand end, stay abreast with the industrial and investment demands for silver. While on the supply side, you need to study predictions and actual mine production, with more focus on prominent countries such as Mexico, Peru, and China, which are the top countries that produce silver.

In contrast, if you’re trading silver futures in macroeconomics, consider the overall economy at different levels, globally and nationally, while also keeping abreast with the relative performance of alternative assets such as gold, oil, the stock market, etc.

Frequently Asked Questions

What is Silver Futures Contract Specs?

Silver Futures contract specifications simply refer to the number of ounces, together with the price per ounce, offered by an exchange. Apparently, silver futures contract specs can vary from exchange to exchange; however, it is important that you take note of this before investing in the silver futures commodity.

What’s The Simple Definition Of Silver Futures Contract

Simply put, a silver futures contract, or futures contract, is a legal agreement between two traders (usually a hedger and a speculator) to buy/sell a specified quantity of silver ounces at the current price (as at the day of the agreement), but the trade or deal is expected to be actualized in a future date.

Who is a Silver Futures Exchange?

A silver futures exchange is a platform where traders (hedgers and speculators) can meet and facilitate a silver future contract virtually. Exchange is more like a broker, who’s definitely going to get some gains for each futures contract carried out on its platform. There are different silver futures exchanges operating in the US and other countries globally.

How Risky is Silver Futures Trading?

Every investment has its own risk; however, silver poses a higher risk due to its high volatility and other market-related factors. It is advisable to start trading silver futures with demo accounts (using virtual cash) provided by some exchange platforms.

How Do You Buy Silver Futures?

The best and safest way to buy silver futures is to purchase from an exchange. Exchanges offer protection against counterparty risks and other risks associated with silver futures investment.

Summary:

This article has extensively covered every possible question and information you need to kickstart silver futures investment. However, you must know that before you validate a trade on any silver futures exchange platform, ensure to check their terms and conditions.

Also, investing in silver is risky; while small-sized E-mini and micro silver futures contracts are backed with leverage, the capital required to upset trades can be cumbersome; hence, you need to set out sufficient capital for this investment.

Silver futures trading is not recommended for amateur traders (traders who are new to the futures market) due to the substantial risks that apply.