Hedging Against Rising Silver Prices using Silver Futures

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    1st Place! Best Binary Broker 2020!
    Best Choice for Beginners — Free Education + Free Demo Acc!
    Sign-up and Get Big Bonus:

  • Binomo
    Binomo

    2nd place! Good choice!

Contents

Hedging Against Rising Silver Prices using Silver Futures

Businesses that need to buy significant quantities of silver can hedge against rising silver price by taking up a position in the silver futures market.

These companies can employ what is known as a long hedge to secure a purchase price for a supply of silver that they will require sometime in the future.

To implement the long hedge, enough silver futures are to be purchased to cover the quantity of silver required by the business operator.

Silver Futures Long Hedge Example

A silverware company will need to procure 3.00 million grams of silver in 3 months’ time. The prevailing spot price for silver is JPY 30.23/gm while the price of silver futures for delivery in 3 months’ time is JPY 30.00/gm. To hedge against a rise in silver price, the silverware company decided to lock in a future purchase price of JPY 30.00/gm by taking a long position in an appropriate number of TOCOM Silver futures contracts. With each TOCOM Silver futures contract covering 30000 grams of silver, the silverware company will be required to go long 100 futures contracts to implement the hedge.

The effect of putting in place the hedge should guarantee that the silverware company will be able to purchase the 3.00 million grams of silver at JPY 30.00/gm for a total amount of JPY 90,000,000. Let’s see how this is achieved by looking at scenarios in which the price of silver makes a significant move either upwards or downwards by delivery date.

Scenario #1: Silver Spot Price Rose by 10% to JPY 33.25/gm on Delivery Date

With the increase in silver price to JPY 33.25/gm, the silverware company will now have to pay JPY 99,759,000 for the 3.00 million grams of silver. However, the increased purchase price will be offset by the gains in the futures market.

By delivery date, the silver futures price will have converged with the silver spot price and will be equal to JPY 33.25/gm. As the long futures position was entered at a lower price of JPY 30.00/gm, it will have gained JPY 33.25 – JPY 30.00 = JPY 3.2530 per gram. With 100 contracts covering a total of 3.00 million grams of silver, the total gain from the long futures position is JPY 9,759,000.

In the end, the higher purchase price is offset by the gain in the silver futures market, resulting in a net payment amount of JPY 99,759,000 – JPY 9,759,000 = JPY 90,000,000. This amount is equivalent to the amount payable when buying the 3.00 million grams of silver at JPY 30.00/gm.

Scenario #2: Silver Spot Price Fell by 10% to JPY 27.21/gm on Delivery Date

With the spot price having fallen to JPY 27.21/gm, the silverware company will only need to pay JPY 81,621,000 for the silver. However, the loss in the futures market will offset any savings made.

Again, by delivery date, the silver futures price will have converged with the silver spot price and will be equal to JPY 27.21/gm. As the long futures position was entered at JPY 30.00/gm, it will have lost JPY 30.00 – JPY 27.21 = JPY 2.7930 per gram. With 100 contracts covering a total of 3.00 million grams, the total loss from the long futures position is JPY 8,379,000

Ultimately, the savings realised from the reduced purchase price for the commodity will be offset by the loss in the silver futures market and the net amount payable will be JPY 81,621,000 + JPY 8,379,000 = JPY 90,000,000. Once again, this amount is equivalent to buying 3.00 million grams of silver at JPY 30.00/gm.

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    1st Place! Best Binary Broker 2020!
    Best Choice for Beginners — Free Education + Free Demo Acc!
    Sign-up and Get Big Bonus:

  • Binomo
    Binomo

    2nd place! Good choice!

Risk/Reward Tradeoff

As you can see from the above examples, the downside of the long hedge is that the silver buyer would have been better off without the hedge if the price of the commodity fell.

An alternative way of hedging against rising silver prices while still be able to benefit from a fall in silver price is to buy silver call options.

Learn More About Silver Futures & Options Trading

You May Also Like

Continue Reading.

Buying Straddles into Earnings

Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]

Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

Hedging Against Falling Silver Prices using Silver Futures

Silver producers can hedge against falling silver price by taking up a position in the silver futures market.

Silver producers can employ what is known as a short hedge to lock in a future selling price for an ongoing production of silver that is only ready for sale sometime in the future.

To implement the short hedge, silver producers sell (short) enough silver futures contracts in the futures market to cover the quantity of silver to be produced.

Silver Futures Short Hedge Example

A silver mining firm has just entered into a contract to sell 3.00 million grams of silver, to be delivered in 3 months’ time. The sale price is agreed by both parties to be based on the market price of silver on the day of delivery. At the time of signing the agreement, spot price for silver is JPY 30.23/gm while the price of silver futures for delivery in 3 months’ time is JPY 30.00/gm.

To lock in the selling price at JPY 30.00/gm, the silver mining firm can enter a short position in an appropriate number of TOCOM Silver futures contracts. With each TOCOM Silver futures contract covering 30,000 grams of silver, the silver mining firm will be required to short 100 futures contracts.

The effect of putting in place the hedge should guarantee that the silver mining firm will be able to sell the 3.00 million grams of silver at JPY 30.00/gm for a total amount of JPY 90,000,000. Let’s see how this is achieved by looking at scenarios in which the price of silver makes a significant move either upwards or downwards by delivery date.

Scenario #1: Silver Spot Price Fell by 10% to JPY 27.21/gm on Delivery Date

As per the sales contract, the silver mining firm will have to sell the silver at only JPY 27.21/gm, resulting in a net sales proceeds of JPY 81,621,000.

By delivery date, the silver futures price will have converged with the silver spot price and will be equal to JPY 27.21/gm. As the short futures position was entered at JPY 30.00/gm, it will have gained JPY 30.00 – JPY 27.21 = JPY 2.7930 per gram. With 100 contracts covering a total of 3000000 grams, the total gain from the short futures position is JPY 8,379,000

Together, the gain in the silver futures market and the amount realised from the sales contract will total JPY 8,379,000 + JPY 81,621,000 = JPY 90,000,000. This amount is equivalent to selling 3.00 million grams of silver at JPY 30.00/gm.

Scenario #2: Silver Spot Price Rose by 10% to JPY 33.25/gm on Delivery Date

With the increase in silver price to JPY 33.25/gm, the silver producer will be able to sell the 3.00 million grams of silver for a higher net sales proceeds of JPY 99,759,000.

However, as the short futures position was entered at a lower price of JPY 30.00/gm, it will have lost JPY 33.25 – JPY 30.00 = JPY 3.2530 per gram. With 100 contracts covering a total of 3.00 million grams of silver, the total loss from the short futures position is JPY 9,759,000.

In the end, the higher sales proceeds is offset by the loss in the silver futures market, resulting in a net proceeds of JPY 99,759,000 – JPY 9,759,000 = JPY 90,000,000. Again, this is the same amount that would be received by selling 3.00 million grams of silver at JPY 30.00/gm.

Risk/Reward Tradeoff

As can be seen from the above examples, the downside of the short hedge is that the silver seller would have been better off without the hedge if the price of the commodity went up.

An alternative way of hedging against falling silver prices while still be able to benefit from a rise in silver price is to buy silver put options.

Learn More About Silver Futures & Options Trading

You May Also Like

Continue Reading.

Buying Straddles into Earnings

Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]

Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

An Introduction To Trading Silver Futures

After gold, silver is the most invested precious metal commodity. For centuries, silver has been used as currency, for jewelry, and as a long term investment option. Various silver-based instruments are available today for trading and investment. These include silver futures, silver options, silver ETFs, or OTC products like mutual funds based on silver. This article discusses silver futures trading—how it works, how it is typically used by investors, and what you need to know before trading.

The Basics

To understand the basics of silver futures trading, let’s begin with an example of a manufacturer of silver medals who has won the contract to provide silver medals for an upcoming sports event. The manufacturer will need 1,000 ounces of silver in six months to manufacture the required medals in time. He checks silver prices and sees that silver is trading today at $10 per ounce. The manufacturer may not be able to purchase the silver today because he doesn’t have the money, he has problems with secure storage or other reasons. Naturally, he is worried about the possible rise in silver prices in the next six months. He wants to protect against any future price rise and wants to lock the purchase price to around $10. The manufacturer can enter into a silver futures contract to solve some of his problems. The contract could be set to expire in six months and at that time guarantee the manufacturer the right to buy silver at $10.1 per ounce. Buying (taking the long position on) a futures contract allows him to lock-in the future price.

On the other hand, an owner of a silver mine expects 1,000 ounces of silver to be produced from her mine in six months. She is worried about the price of silver declining (to below $10 an ounce). The silver mine owner can benefit by selling (taking a short position on) the above-mentioned silver futures contract available today at $10.1. It guarantees that she will have the ability to sell her silver at the set price.

Assume that both these participants enter into a silver futures contract with each other at a fixed price of $10.1 per ounce. At the time of expiry of the contract six months later, the following can occur depending upon the spot price (current market price or CMP) of silver. We will walk through several possible scenarios.

In all the above cases, both the buyer/seller achieves buying/selling silver at their desired price levels.

This is a typical example of hedging—achieving price protection and hence managing the risk using silver futures contracts. Most futures trading is intended for hedging purposes. Additionally, speculation and arbitrage are the other two trading activities which keep the silver futures trading liquid. Speculators take time-bound long/short positions in silver futures to benefit from expected price movements, while arbitrageurs attempt to capitalize on small price differentials that exist in the markets for the short term.

Real World Silver Futures Trading

Although the above example provides a good demo to silver futures trading and hedging usage, in the real world, trading works a bit differently. Silver futures contracts are available for trading on multiple exchanges across the globe with standard specifications. Let’s see how silver trading works on the Comex Exchange (part of the Chicago Mercantile Exchange (CME) group).

The Comex Exchange offers a standard silver futures contract for trading in three variants classified by the number of troy ounces of silver (1 troy ounce is 31.1 grams).

  • full(5,000 troy ounces of silver)
  • miNY (2,500 troy ounces)
  • micro (1,000 troy ounces)

A price quote of $15.7 for a full silver contract (worth 5,000 troy ounces) will be of total contract value of $15.7 x 5,000 = $78,500.

Futures trading is available on leverage (i.e., it allows a trader to take a position which is multiple times the amount of the available capital). A full silver futures contract requires a fixed price margin amount of $12,375. It means that one needs to maintain a margin of only $12,375 (instead of the actual cost of $78,500 in the above example) to take one position in a full silver futures contract.

Since the full futures contract margin amount of $12,375 may still be higher than some traders are comfortable with, the miNY contracts and micro contracts are available at lower margins in equivalent proportions. The miNY contract (half the size of the full contract) requires a margin of $6,187.50 and the micro contract (one-fifth the size of a full contract) requires a margin of $2,475.

Each contract is backed by physical refined silver (bars) which is assayed for 0.9999 fineness and stamped and serialized by an exchange-listed and approved refiner.

Settlement Process for Silver Futures

Most traders (especially short term traders) usually aren’t concerned about delivery mechanisms. They square off their long/short positions in silver futures in time prior to expiry and benefit by cash settlement.

The ones who hold their positions to expiry will either receive or deliver (based on if they are the buyer or seller) a 5,000-oz. COMEX silver warrant for a full-size silver future based on their long or short futures positions, respectively. One warrant entitles the holder the ownership of equivalent bars of silver in the designated depositories.

In the case of miNY (2,500-ounce) and micro (1,000-ounce) contracts, the trader either receives or deposits Accumulated Certificate of Exchange (ACE), which represents 50 percent and 20 percent ownership respectively, of a standard full-size silver warrant. The holder may accumulate ACE’s (two for miNY or five for micro) to get a 5,000-ounce COMEX silver warrant.

Role of the Exchange in Silver Futures Trading

Forward trading in silver has been in existence for centuries. In its simplest form, it is just two individuals agreeing on a future price of silver and promising to settle the trade on a set expiry date. However, forward trading is not standard. It is therefore full of counterparty default risk. (Related: What Is the Difference Between Forward and Futures Contracts?)

Dealing in silver futures through an exchange provides the following:

  • Standardization for trading products (like the size designations of full, miNY or micro silver contracts)
  • A secure and regulated marketplace for the buyer and seller to interact
  • Protection from a counterparty risk
  • An efficient price discovery mechanism
  • Future date listing for 60 months forward dates, which enables the establishment of a forward price curve and hence efficient price discovery
  • Speculation and arbitrage opportunities that require no mandatory holding of physical silver by the trader, yet offer the opportunity to benefit from price differentials
  • Taking short positions, both for hedging and trading purposes
  • Sufficiently long hours for trading (up to 22 hours for silver futures), giving ample opportunities to trade

Market Participants in the Silver Futures Market

Silver has been an established precious metal in dual streams:

• It is a precious metal for investment

• It has industrial and commercial uses in many products

This makes silver a commodity of high interest for a variety of market participants who actively trade silver futures for hedging or price protection. The major players in the silver futures market include:

Hedging Silver

Hedging is done to mitigate the risks associated with the change in price of an asset. Most of the commercial establishments that deal in physical markets such as manufacturers, traders, wholesalers, or retailers use derivative markets to hedge their business risks.

Hedging involves in establishing a position in the futures market that is equal and opposite to the position held in the physical market segment.

As the price movement of futures contract mirrors the price movement of the underlying, the opposite position taken by the hedger results in locking-in of the price of the asset. The loss in one market is compensated by the gain in the other market.

Hedging activity can be classified as:

Short Hedge: involves selling futures contract to cover the risks of a long position in the physical commodity.

Long Hedge: involves buying a futures contract to cover a short position in the physical commodity.

The following two examples will make hedging clear:

Short Hedge
(Long Physical / Short Future):
John Doe, a gold & jewelry shop owner holds 3000 kgs of silver that he bought at $9.75 per troy ounce (TOZ.)

He wants to protect himself from the risk of adverse price movement. As he is long in physical silver, he should take an equivalent short (sell) position in Silver Futures. For a silver futures contract, the underlying quantity of silver is 1000 TOZ or 30 kgs.

John Doe accordingly, sells 100 silver futures contract at a price of $9.85/TOZ. The contract is to expire after 2 months. After a month the price of spot silver fell to $9.35/TOZ.

John Doe sold off his stock at that price. He simultaneously removed the hedge i.e. bought back the 100 silver futures contracts @ $9.45/TOZ.

His net profit/loss position will be:
• Loss in Physical stock:
$0.40/ TOZ. (9.75 – 9.35)
• Profit in Futures position:
$0.40/ TOZ. (9.85 – 9.45)

If the hedge had not been undertaken John Doe would have lost $ 0.40/ TOZ which would have resulted in a whooping total loss of $40,000/- (0.40 * 100 * 1000).

Long Hedge
(Short Physical / Long Future):
On 15th April, John Henry a silver merchant took an order to supply 300 kgs. of silver @ $10.15/- TOZ in June 2006.

The spot price at the time of taking the order is $10.05/- TOZ and July 2006 silver futures contracts are selling at $10.25/ TOZ.

John Henry wants to take a hedge. He buys 10 silver futures contracts @ $10.25/ TOZ. on 15th April. At the time of delivery of the order in June, the Silver prices rise to $10.65/ TOZ. In order to fulfill his commitment John Henry buys silver at that price and delivers it to the buyer.

He simultaneously removes the hedge by selling the 10 silver futures contract at $10.80/ TOZ.

His net profit/loss position will be:
• Loss on physical silver:
10.65-10.05 = $0.60/- TOZ.
• Total loss:
$6000/- (0.60 * 10 * 1000)
• Profit in Futures:
10.80-10.25 = $0.55/- TOZ.
• Total Profit:
$5500/- (0.55 * 10 * 1000)
• Net loss incurred:
$500/- ($6000 – $5500)

In this example, even though John Henry hedged his position, it did not eliminate his losses fully. But it helped him mitigate losses to the extent of ($5500). If the hedge had not been taken, he would have lost ($6000) instead of a trivial ($500).

Gold & Silver Futures Contracts

Gold and silver futures are traded on several exchanges across the globe. These instruments can give investors exposure to gold and silver while only putting up a fraction of the total cost of the contract. Because of this leverage, gold and silver futures are not to be taken lightly and are certainly not appropriate for all investors.

What Exactly is a Gold or Silver Futures Contract?

Futures contracts were first traded in the mid-19th century with the establishment of a central grain market. This central grain market gave farmers the ability to sell their grain for immediate delivery in what is known as the spot market, or they had the option to sell their grain for a certain price for a future delivery date. A futures contract is a legal agreement between the buyer and the seller for the purchase or sale of an asset on a specific date during a specific month.

The purchase and sale of futures contracts is facilitated through a futures exchange and is standardized in terms of quality, quantity, and delivery time, as well as delivery location. The price of a futures contract is not fixed, however, and is constantly in a state of discovery through an auction-like process on exchange trading floors and/or electronic trading platforms. In the case of gold or silver, a futures contract outlines a specific delivery time and place for “good delivery” gold or silver bullion.

Who Uses Futures Contracts?

The use of futures contracts generally falls into two broad categories: hedging and speculative purposes. A hedger uses futures contracts to try and mitigate their price risk in an asset, while a speculator accepts this price risk in order to try and profit from favorable movement in prices. The market needs participation from both hedgers and speculators to function properly.

Hedgers may include producers, portfolio managers and consumers. For example, if a farmer produces corn and is concerned about the per-bushel price of corn falling and thus reducing his potential profit, he or she could sell futures contracts. If a corn farmer sold a futures contract today for delivery in five months at a price of $4.00 per bushel, then if the price of corn falls between now and the delivery date the farmer would lose money on his cash crop but would be offsetting those losses by gains made on the sale of the futures contract.

In other words, if Farmer Joe sold corn futures at $4.00 per bushel and corn prices drop to $3.50 per bushel, the Farmer Joe would have a $.50 profit on each corn future sold that would offset the $.50 loss he is seeing on his corn. By doing this, Farmer Joe has insulated himself from a large drop in the price of corn that could adversely affect his potential income.

On the flip side, however, if farmer Joe sells corn futures contracts at $4.00 per bushel and the price of corn rises to $4.50 per bushel, then Joe will be getting more money for his corn crop but will be losing money on the short futures contract. Hedgers must accept this potential profit loss in order to lock in future prices. The bottom line is that many producers and consumers will give up the potential for additional profit in order to try and protect themselves from the potential for loss. This is how futures contracts may be used to try and mitigate price risk.

Gold & Silver Futures Contract Value

A gold futures contract is for the purchase or sale of 100 troy ounces of .995 minimum percent fine gold. A silver futures contract is for the purchase or sale of 5000 troy ounces of .999 percent minimum fine silver. At today’s prices, therefore, a gold futures contract would be worth approximately $130,300 with gold currently trading at $1,303 per ounce. A silver futures contract would have a value of $103,150 with silver currently trading at $20.63 per ounce. Needless to say, the total contract value will fluctuate as gold and silver prices move up or down.

How Exactly Does a Futures Contract Work?

With a gold or silver futures contract, he or she is entering into an agreement through an exchange to buy or sell the metal at a certain date in the future. The most recognized exchange when it comes to metals trading is the COMEX exchange which is now part of Chicago’s CME Group. To buy or sell a futures contract, one does not need to have the entire amount of the contract value but rather must put up what is known as a margin deposit. A margin deposit is a good-faith deposit to make good on the contract.

The fact that futures contracts only require a small portion of the contract value makes them a leveraged instrument. For example, if a gold contract has a total value of approximately $130,000 at current prices, only a small deposit of about $5940 is needed to buy or sell the contract. In other words, one can control $130,000 worth of gold for less than $6000. This may potentially allow some investors to make a significant return on their investment, but also may cause large losses.

Due to the nature of these vehicles, one’s losses can exceed their account equity. Leverage is a double-edged sword and is not suitable for all investors. Speculators may use these contracts to try and profit from price movement in gold or silver while hedgers may use them to try and mitigate price risk. While you can take physical delivery on a gold or silver futures contract, most futures contracts these days are closed prior to expiration or are cash-settled.

If I Buy A Gold Futures Contract, Do I Own Gold?

This is kind of a tricky question to answer. When purchasing a gold futures contract, you can take delivery on that contract of the physical gold. This process can be lengthy and somewhat complicated, however. One does not have the physical gold in their possession until they take delivery and even then the gold will likely be held in a depository until it is transferred to the location of their choice. Most futures contracts are never delivered upon, and gold and silver are no exception. When looking to buy physical gold, there are easier ways to purchase physical metal.

Gold & Silver Futures FAQs

Why would someone sell a futures contract rather than buy it?

Futures contracts can allow one to potentially capitalize on price movements in the market. The reasons for someone selling a futures contract rather than buying could be they believe that prices are going to come down, or they could be a producer looking to try to hedge their price risk. For example, a jewelry maker whose potential profit may be hurt by falling gold prices could decide to sell gold futures in order to try to mitigate this risk.

Are Gold and Silver Futures Risky?

Trading gold and silver futures contracts involves substantial risk — and trading any futures contract involves substantial risk for that matter. Because of the leveraged nature of these types of investment vehicles, investors have the potential to make large profits but also have the equal potential to suffer large losses. In fact, due to the leverage involved, he or she can lose all of the funds in their account very quickly. One can lose more than all of the funds in his or her account as well. Trading in gold or silver futures contracts is not the same as owning the physical metal that one can wrap their hands around.

Would I be better off trying to time the gold or silver markets and trading them accordingly?

The fact of the matter is that the vast majority of investors are poor market timers. Think of how many professionals are out there today trying to “beat the market.” The majority of these professionals cannot beat the benchmark SP500 index. We are not saying it cannot be done, but for most people we believe this type of mentality is not going to be of benefit. That being said, paper investments such as futures, ETFs or the like do not equal physical metal ownership and do not accomplish the same goals.

What about the gold and silver ratio? Can it be helpful?

The gold and silver ratio is simply the number of ounces of silver that equals the value of one ounce of gold. So, with gold trading at $1,310 per ounce and silver trading at $20.05 per ounce, the gold/silver ratio would be 65.34. Some precious metals investors do monitor this ratio in order to try to get some type of buying advantage. For example, if the price of silver is low relative to the price of gold, one may buy silver coins, rounds or bars rather than gold. On the other hand, if the price of silver is relatively expensive to gold, then one may elect to purchase gold coins or bars. It is simply another tool that attempts to determine relative value.

Is it easier to take delivery of a futures contract rather than buying gold or silver from a dealer?

No. Taking delivery from an exchange on “good delivery” gold or silver is neither a simple nor a cost-efficient process. There are several hoops that must be jumped through in order to do this and in addition to those hoops there are fees and costs involved, as well.

What about hedging my physical metals with futures?

One of the biggest uses of futures contracts is for hedging purposes. Hedging involves the purchase or sale of a contract that can potentially help offset losses in a physical market. For example, if a jeweler is worried about the price of silver going up dramatically and squeezing his or her profits, they could buy a silver futures contract to try to help mitigate this risk. If the price of silver does, in fact, start to rise, then the jeweler would potentially see gains on the long futures contract that may help offset losses he or she is seeing on their profits due to higher silver prices.

Is hedging appropriate for the average physical metals investor out there?

This is very debatable, but, again, due to the nature of futures contracts they are certainly not suitable for all investors. Proper hedging requires a good deal of market knowledge and expertise and is beyond the normal investor’s investment acumen. In addition, if one is buying gold or silver for the long-term, they should be prepared for and accept any declines in prices that may occur.

Why do gold and silver futures move around so much?

Gold and silver are very active, and global markets trade nearly around the clock now. These markets can potentially be affected by many different things such as geopolitical events, central bank action or commentary, outside markets, such as oil or the dollar, and investor risk appetite. The markets are basically in a constant state of price discovery and, therefore, may have periods of quiet price activity and may have periods of very heavy price activity.

Do I need to monitor gold and silver futures prices every day if I own the metals?

This is totally up to you. We believe that physical gold or silver ownership is a long term investment and should be treated accordingly. The markets will have day to day or even second to second fluctuations in price. If you are looking at a long term time horizon, then these fluctuations are not too important in the grand scheme of things. That being said, you can monitor the price of metals on a daily basis if you so choose. The web is full of free resources to follow or track commodity or market prices, including on our gold price and silver price charts.

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    1st Place! Best Binary Broker 2020!
    Best Choice for Beginners — Free Education + Free Demo Acc!
    Sign-up and Get Big Bonus:

  • Binomo
    Binomo

    2nd place! Good choice!

Like this post? Please share to your friends:
Binary Options Trading Wiki
Leave a Reply

;-) :| :x :twisted: :smile: :shock: :sad: :roll: :razz: :oops: :o :mrgreen: :lol: :idea: :grin: :evil: :cry: :cool: :arrow: :???: :?: :!: