Silver is a commodity traded globally in cash and futures markets. Contracts have fixed sizes and terms, with most trading in the “close” month. NYMEX trades silver contracts in increments of 0.5 cents, with each increment worth $25. Traders bet on prices going up or down, and must exit positions before the first warning day. Risk increases with fewer contracts traded, with silver futures trading averaging 109,000 contracts per day.
A commodity is something for which there is a demand; silver goods are those which consist of elemental metallic silver. The silver commodity market includes both cash and futures. Both are traded all over the world. Trading in silver commodities is done by large corporations and mines, hedge funds and futures funds, and by private individuals.
Commodity futures contracts have a fixed size and a fixed term. The duration of the silver commodity contract is determined by the expiration month. The contracts that expire in July and December have a duration of 60 months; contracts expiring in January, March, May and September have a duration of 23 months. Most trading is done in the “close” month, which refers to the contract that has at least one month to go. The size of a silver commodity contract is 5,000 troy ounces (155,517.384 grams).
Commodity silver contracts trade on the New York Mercantile Exchange (NYMEX), in increments of 0.5 cents. The actual contract price of the silver would not be listed as $30 but as 30,000. The next highest price would be 30,005 and the next lowest price would be 29,995. Therefore, each increment is worth $25 for each contract controlled by a trader. The maximum number of contracts a trader can control is 6,000, or 30 million troy ounces (933 million grams) of silver.
A contract is a promise to buy or sell a specified amount of silver when the contract expires. Most contracts are bought or sold by speculators, people who bet on the price going up or down, rather than people who actually want to own silver. A trader who thinks the price is falling will enter into a contract to sell silver; it is said to be “low”. The trader who agrees to buy that silver is said to be “long” and thinks prices will go up. The trader who is long will eventually close out his position, going flat by selling his contract.
A trader will have to exit his position before the first warning day, i.e. two business days before the first of the contract month. Brokers will not allow a trader to continue holding a position on the first day of notice unless the trader has enough money in his account to cover the cost of the entire contract. For example, if silver was priced at $30 a troy ounce (31.1 grams) the day before the alert day, the trader would need more than $150,000 in cash in his account to prevent his broker from close your position. On the other hand, a true producer of silver raw materials such as a mine would deliver the metal, which must be 99.9% pure.
A trader’s risk increases if relatively few contracts are traded. According to NYMEX, silver commodity futures trading averages approximately 109,000 contracts per day. While 109,000 contracts every day sounds like a large number, it’s not. For comparison, the most popular future on the stock market, the S&P 30mini, trades more than 2 million contracts a day, and the 10-year Treasury bill contract trades about 1.5 million contracts a day.
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