Key Things to Know About the Silver Futures Market

Why Do Silver Futures Exist

The theory of economics supplies many explanations regarding the occurrence of the coordinated futures marketplaces that have now been frequently contested by traders. In early stages, the very first faculty of idea hypothesized the comprehension for presence of their futures marketplaces was a result of the means to offer amount insurance plan.

This type of reasoning gave the opinion that the futures were tools which organizations may use to take care of their own risks to the vulnerability to the primary stocks by the futures marketplaces.

Thus, stocks marketplaces existed on account of the simple fact it offered speculators and investors, and the prospects of offering favorable yields. Nevertheless, the simple fact price risk might be moved together with the forwards contract gave the opinion that neither of both of these things had been valid.

Another contradictory perspective for this comprehension the futures marketplaces existed is because they offered speculators lower costs of trades for exactly the equal stocks should they coped with the bucks marketplaces. The futures contracts are traded at a structured frame and include a complex set of rules such as trading.

The aforementioned traits are regarded as a means for decreasing the deal fees also to really make the futures contracts more advanced than trading different derivatives like the forwards contracts.

  • Characteristics of those silver inventories marketplaces
    • Uncertainty
    • Price correlations
    • Potential for curious participants
    • Value of trades
  • The disadvantage of this silver inventories marketplaces
  • What could be the part of the futures marketplaces?

    If a person discusses the stocks marketplaces whilst the derivatives marketplaces, the clear answer can be a resounding yes. Forex marketplaces are all demanded for traders because provides benefits of:

    • Price discovery
    • Risk direction
    • Speculative action

    All these 3 facets Are Crucial for the market to function properly.

    Silver (spot) and Silver (stocks ) costs

    Price discovery

    The derivatives marketplaces play an essential part in specifying the amount discovery to the existing and the future costs of the product or perhaps the share. Price discovery is just one of the very necessary areas of the financial climate as costs of these stocks proceed at precisely the equal way in the hopes of this store participations.

    Price discovery is equally essential and specially critical for its manufacturers along with also the merchants. By way of instance, in case your silver mining company would like to promote their silver at the store per month later on, the very best method of amount discovery would be that the futures marketplaces at which centered on the supply-demandthe silver mining company might hence recognize the amount of the futures contract.

    Likewise, by the merchants’ perspective the futures marketplaces can allow the merchants to validate the amount of the futures contracts for the silver stocks that are common and could therefore enable merchants from anywhere to validate their costs and trade accordingly based on the futures pricing for silver.

    Risk Management

    Market uncertainties can often expose the store participants to unexpected losses in many different ways. The derivates marketplaces in this aspect can offer the store participants the opportunity to hedge their risks by trading the derivates such as the silver futures in this case.

    For example if a trader has purchased some contracts in the spot store for silver and they expect the amount of silver to fall in the near future but unsure how big the decline will be, silver traders can simply look to going short on the silver futures contracts and hedge their risks accordingly.

    Besides the above example, even asset traders can look to the silver futures marketplaces where they can hedge the risks of amount volatility in silver directly and manage their exposure to the silver mining companies accordingly.

    Thus, silver futures play an important role in providing risk management for the store participants which would have been otherwise impossible.

    Speculative activity

    Speculators in the futures marketplaces make up for a significant portion in terms of bringing volatility and liquidity to the marketplaces which would have been otherwise dominated by simply the merchants and the producers.

    Due to the volume of activity, speculators can quickly switch positions from long to short or vice versa. More importantly, any amount imbalances are quickly filled by the speculators who are constantly on the lookout for any arbitrage opportunities that presents itself every now and then.

    One of the main factors driving speculative trading activity in the futures marketplaces is not the fundamentals but the mass sentiment in the marketplaces. Speculators often tend to be irrational and at times can switch positions quickly which may seem counter trend or counter intuitive. What they do as a result is ensure that there is deep liquidity in the futures marketplaces, which is essential.

    The amount imbalances along with the speculator activity ensures that the futures marketplaces pricing is always in a state of constant amount discovery and reflects the true store value at any time.

    Unlike the merchants and the producers who deal with the underlying share in one form or another, such as farmers growing crops or the merchants taking delivery of the raw materials or the underlying share speculators are a lot more flexible.

    Because speculators do not deal with delivery of the underlying contracts, such groups of traders are flexible and quick enough to take improvement of the volatility, in part contributing to the volatility themselves.

    One of the key aspects that helps in understanding the silver futures marketplaces is the fact that the futures marketplaces brings about flexibility in the way traders can deal with the share in question.

    Characteristics of the silver futures marketplaces

    We can identify that the silver futures marketplaces, just like any other share or commodity that is traded on the futures marketplaces needs to have some characteristics to make it successful. Some of these include:

    • Uncertainty
    • Price correlations
    • Potential for interested participants
    • Value of transactions

    Uncertainty

    This is one of the key reasons for the futures marketplaces to exist in the before all else place. When store participants are unsure about amount, then the buyers and sellers with exposures can make use of the futures marketplaces to hedge their risks. Without uncertainty, there would be no requirement for traders to make use of the futures marketplaces to hedge their risks.

    Price correlations

    Price correlations in the futures marketplaces refer to the costs across the different specifications and the locations of delivery of the stocks in question. Typically, a futures contract is based on the commodity or the share which is standardized in the grade and the location of delivery.

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    Futures marketplaces, based on the contracts can help in establishing the grades and the amount differentials which broadens the appeal for the futures marketplaces. The correlation can also help speculators. For example, gold/silver ratio is a metric that is commonly used in the marketplaces.

    The gold/silver ratio tells how a lot of of silver can purchase one ounce of gold and thus shows whether gold is overpriced or underpriced compared to silver futures. Traders can make use of this correlation in the middle the gold and silver futures costs to understand when to purchase or sell silver.

    Potential for interested participants

    When there are a large number of store participants involved in the share ‘s production, delivery and consumption, the larger the potential for attracting a wider range of store participants.

    In the silver futures marketplaces, the mining and exploration companies make up the producer side of the business, while electrical component manufacturers, jewelers and other businesses having to do with silver make up the consumption side of the business.

    Between the producers and the merchants, the speculators make up for the remainder of the store participants who are responsible for bring liquidity and volatility to the silver futures marketplaces

    Value of transactions

    With all things being constant, greater the value of the product that is sold, the bigger the value of reducing risks. In other words, when there is more at stake, investors who are averse to risk often want to hedge more in the derivatives marketplaces. Similarly, traders also want to speculate more in such marketplaces as well.

    This is because there are bigger incentives for people to invest and speculate when the deal values are large.

    The downside of the silver futures marketplaces

    Despite the fact that the silver futures store brings long term profits in maintaining the store equilibrium, it is by no means fool-proof.

    Although the futures marketplaces have become more vigilant and tighter in terms of compliance, the most famous story of the silver futures marketplaces is the story of the Hunt Brothers who attempted to corner the silver store in the early 1970’s via futures.

    The Hunt Brothers, William Herbert and Lamar started to build big positions in the silver futures over the years. By 1979 the Hunt brothers as they were commonly referred to managed to build an estimated $2 billion to $4 billion in positions, speculating on silver.

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    The silver holdings based on their contracts were estimated to be around 100 million troy ounces. During the process of accumulating the silver futures for nearly nine years, the Hunt brothers managed to push the amount of silver from $11 in September 1979 to $50 an ounce by January 1980.

    Silver costs – Hunt Brothers (By Realterm – Own work, CC BY-SA 3.0)

    Silver Thursday, which occurred on March 27, 1980, saw the costs of silver fall sharply leading to a panic in the marketplaces. Around the time, the Hunt brothers were estimated to have held nearly one third of the world’s silver supply (partially on paper).

    The strong rally in the silver costs eventually led to the COMEX exchange changing rules on leverage and margin, which left the Hunt brothers who were already heavily leveraged vulnerable to the additional margin requirements.

    As the silver amount started to fall sharply, the Hunt brothers were in effect faced with a margin call from their brokerage firms to the tune of nearly $100 million. Unable to meet the margin call requirements, the hunt brothers were faced with a potential $1.7 billion loss on their trades.

    As a consequence of the attempt to corner the silver store, a consortium of U.S. banks had to eventually come together to form a rescue package for the brokers with whom the Hunt brothers had become over-leveraged.

    The silver store manipulation is often widely quoted by many opponents to the futures marketplaces who often cite that the futures marketplaces are manipulated. One of the biggest gripes being that the futures marketplaces for silver has become a hotbed for speculative trading with no underlying stocks to back up the contracts.

    This is further evidenced by the fact that the silver futures marketplaces is no stranger to sudden amount drops that are a common occurrence in the precious metals futures marketplaces, including gold and silver.

    Silver futures drop 4% without any concrete comprehension (Source – Goldcore.com)

    This is however attributed to the algos and automated trading with no concrete evidence ever presented so far that points to manipulation in the precious metals futures marketplaces.

    Although the term silver futures might limit it to the share (silver) the fact that this remains the key commodity for most of the other stocks makes it important. For example, silver mining shares are merely a reflection on the trader’s valuation on the silver mining business.

    Thus, although trading silver mining shares is not directly related to silver, it is indirectly related and as a result, the amount movements in the silver as an share tends to have an impact on the asset amount of the silver mining shares.

    Although one could argue that the spot marketplaces are efficient in itself, the silver futures marketplaces brings an additional layer of amount discovery and equilibrium. Furthermore, the basic framework of the futures marketplaces enables traders to transact in the contracts efficiently.

    While silver futures costs tend to track the costs of the spot silver futures marketplaces, the fact remains that the spot futures marketplaces are largely unregulated and can be subject to amount manipulation. Thus, the silver futures marketplaces are the next best option for traders who prefer a more transparent approach to trading.

    Because of the way the futures marketplaces are designed, traders who are directly dealing with the silver futures contracts can also focus on the aspects of transparency such as the settlement costs, the trading volume and so on, which is clearly missing in the spot marketplaces for silver.

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