By Noble Drakoln

Silver is the whitest, most malleable and most conductive metal available. It has enjoyed a variety of uses throughout history, most notably as a form of money and jewelry. The first evidence of its use as currency dates back to around 700 B.C.E., in what is now Turkey. Silver has adorned tombs from Chaldea to China, and was one of the prime movers of European history after the discovery of the New World.

While silver is less rare than gold, it has played a significant role in affecting currencies and has consistently moved in tandem with gold prices. The British pound derives its name directly from the fact that a British pound was once considered to be worth one pound of sterling silver. Over 14 languages use synonymous terms for silver and money. In fact, the U.S. dollar prior to the Civil War was also backed by silver. (This method may seem arcane, but many well-established strategies rely on it. Find out more in Trading The Gold-Silver Ratio.)

In 1971, the U.S. moved away from the gold standard, effectively becoming a fiat currency. This led to an increase in the value of gold and also a significant run up in the value of silver. For the first time, the status of silver and gold as precious metals was established around the world, as was the interrelationship of their price movement. In 1973, the Hunt brothers used their enormous fortune, along with bank leverage, to try to corner the silver market. Through their actions and the speculative nature of the metals market at the time, silver peaked at over $50 per ounce by 1980, with a majority of that increase ($41) occurring over the last six months of 1979.

A sample commodity futures contract for silver is shown in the following table.

Silver Contract Specifications
Ticker Symbol Open Outcry: SI (NYMEX)
Electronic: ZI (eCBOT)
Contract Size 5,000 troy ounces
Deliverable Grades Refined silver
1. Assayed at 0.999 fineness
2. As cast bars of 1,000 or 1,100 troy ounces
3. Stamped and serialized by an exchanged listed and approved refiner
Contract Months Jan, March, May, July, Sept, Dec
Trading Hours NYMEX Open Outcry: Monday-Friday 10am-1:30pm EST
eCBOT Electronic: Sunday-Friday 6:16am-4pm CST
Last Trading Day Third to last business day of the contract month
Last Delivery Day Last business day of the contract month
Price Quote Cents per troy ounce
Tick Size NYMEX: .5 cents per troy ounce ($25 per contract)
eCBOT: .1 cents per troy ounce ($5 per contract)
Daily Price Limit
(Not applicable in electronic markets)
1. Movable 10 cents above or below previous day\'s settlement for first and second listed month
2. Once the contract with the highest open interest hits this limit, a suspension is triggered
3. New limit is 10 cents above or below the price at which the suspension was triggered

Understanding Silver Contracts
Like every commodity, silver has its own ticker symbol, contract value and margin requirements. To successfully trade a commodity, you must be aware of these key components and understand how to use them to calculate your potential profits and loss.

For instance, if you buy or sell a silver futures contract, you will see a ticker tape handle that looks like this:

SI8K @ 1794.0

This is just like saying "Silver (SI) 2008 (8) May (K) at $17.94/ounce (1794.0)." A trader will buy or sell a silver contract according to this type of quotation.

Depending on the quoted price, the value of a commodities contract is based on the current price of the market multiplied by the actual value of the contract itself. In this instance, the silver contract equals the equivalent of 5,000 troy ounces multiplied by our hypothetical price of $1,794, as in:

$17.94 x 5,000 troy ounces = $89,700

Commodities are traded based on margin, and the margin changes based on market volatility and the current face value of the contract. To trade a silver contract on NYMEX requires a margin of $7,763, which is approximately 9% of the face value. To trade a silver contract on the eCBOT requires a margin of $10,125, which is approximately 11% of the face value.

Calculating a Change in Price
Because commodity contracts are customized, every price movement has its own distinct value. In a silver contract, a one-cent move is equal to $50. When determining NYMEX's silver profit and loss figures, you calculate the difference between the contract price and the exit price, and then multiply the result by $50. For example, if prices move from $1,794.0 to $1,750.0, you multiply the difference, which is $44, by $50 to yield a contract value change of $2,200.

- Buy Sell Total Value
Silver Contract Price (1 cent move = $50) $17.94 $17.50 .44 cents or $2,200

Silver Exchanges
The futures contract for silver is traded at the New York Mercantile Exchange (NYMEX) through its Commodity Exchange (COMEX) division via open-outcry. It is also traded electronically through the Chicago Board of Trade (eCBOT), the Indian National Commodity and Derivatives Exchange (NCDEX), Dubai Gold and Commodities Exchange (DGCX), Multi Commodity Exchange (MCX) and Tokyo Commodity Exchange (TOCOM).

Facts About Production
As a rare and precious metal, silver derives its price from its availability on the open market, so world production numbers are an important statistic to consider. About 7.6 billion ounces of silver were mined during the 4,400 years leading up to the discovery of the New World. In the approximately 440 years since then, production has increased to 15 billion ounces. As of 2006, half of the world's cumulative production of nearly 45 billion ounces was mined over the last 60 or so years.

Silver production, especially by the largest mining companies, seems to have flattened (if not declined), which could determine the direction of prices in the coming years. An important point to keep in mind is that older production techniques, where the silver is mined from veins already in operation, will shut down as production slows, which could also impact price direction as uncertain newer production sources are sought. (Find out how the largest speculative attempt to corner the market went awry in Silver Thursday: How Two Wealthy Traders Cornered The Market.)

Factors That Influence Silver's Price
The price of silver is influenced by the following factors:
  • Silver is typically extracted from ore, usually of copper, gold and zinc.
  • Copper, which alone accounts for 26% of all of the silver mined, is a commodity that is heavily dependent on demand from the housing market. Because copper is used in new home construction, any change in the housing market can affect its demand, which can signal an indirect turn for the supply of silver, and therefore its prices.
  • Film photography, despite the advent of digital imaging, still represents an important application for silver and thereby renders it a critical player as a low-cost, high-quality standard.
  • Silver's conductivity makes it integral to the electronics industry, where it is used for circuits and switches.
  • Solar panels use silver paste to conduct electricity from the silicon photovoltaic cells and are becoming more common as a cost-effective energy source.
  • Silver tends to track the price of gold. Although the correlation between the two metals is not hard and fast, price charts certainly show that as gold rises and falls, so does silver.
  • Silver represents another method that investors use for hedging currency risk through precious metals as the dollar weakens.
Silver is one of the most versatile metals available. Used as both an industrial metal and a hard asset, it plays double duty in the commodities market. Trading it and predicting its price is a careful balancing act between what consumers need and what the currency market demands.

Next: Commodities: Soybeans »

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