Silver is a commodity traded globally by large corporations, hedge funds, futures funds, and individuals. Contracts have fixed sizes and lifetimes, with most trading done in the “near” month. Speculators dominate the market, and traders must exit positions before the first day of notice.
A commodity is something for which there is a demand; Silver wares are those consisting of the elemental metal silver. The silver products market includes cash and futures. Both are marketed worldwide. Commodity trading of silver is done by large corporations and mines, hedge funds and futures funds, and by individuals.
Commodity futures contracts have a fixed size and a fixed lifetime. Contract life periods for silver products are determined by the month of expiration. The contracts that expire in July and December have a useful life of 60 months; Contracts that expire in January, March, May and September have a useful life of 23 months. Most of the trading is done in the “near” month, which refers to the contract that has at least one month to expiration. 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 0.5 cent increments. The actual price of the silver contract would not be displayed 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 a trader controls. 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 ends. Most contracts are bought or sold by speculators, people who are betting that the price will go up or down, rather than people who actually want to own silver. A trader who thinks the price is falling will sign 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 that prices will rise. The trader who is long will eventually close out his position, going “flat” by selling his contract.
A trader must exit his position before the first day of notice, which is two business days before the first of the contract month. Brokers will not allow a trader to continue to hold a position until 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, the day before the notice day, silver is priced at $30 per troy ounce (31.1 grams), the trader would need more than $150,000 in cash in his account to prevent his broker from closing his position. On the other hand, a true commodity producer of silver, such as a mine, would deliver the metal, which must test for 99.9 percent purity.
A trader’s risk increases if comparatively few contracts are traded. According to NYMEX, silver commodity futures trading averages nearly 109,000 contracts daily. While 109,000 contracts each day sounds like a big number, it’s not. By comparison, the most popular future on the stock market, the S&P 30mini, trades more than 2 million contracts daily, and the 10-year Treasury contract trades about 1.5 million contracts daily.
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