How to Trade Silver

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Updated: 25 August 2020

Many of us view silver as a secondary precious metal, taking a back seat to gold. The truth of the matter is that silver has several uses beyond jewelry, including its importance in making photovoltaic electricity, and there are many reasons to trade silver.

Silver is a commodity that is impacted by global macro events and is actively traded as futures contracts, exchange-traded funds, contracts for differences, bullion, and coins.

Several strategies can be used to determine the future direction of silver prices, including fundamental strategies, technical analysis strategies, sentiment strategies, and relative value methods (trading silver versus gold).

What is Silver?

Silver is a commodity and is widely traded throughout the globe. Silver and gold are considered precious metals along with platinum and palladium. Silver also has many different industrial uses, including a photovoltaic (PV) conductor allowing sunlight to be converted into electricity.

Silver is also considered an industrial metal. In 2020 the California Energy Commission announced that it will require that each home built in the state will have a solar rooftop. The new state regulation will require that 15,000 homes built each year in the states of California will have clean energy allowing the state to save more than 1.7-billion dollars in energy costs over the next 3-decades.

In addition to the residential laws, the CEC is also targeting commercial buildings that will be required to be net-zero by 2030. The law comes in the wake of electricity outages that California has experienced over the past decade. The new law went into effect on January 1, 2020, and applies to new residences.

How Are Silver Prices Determined?

As a multi-dimensional metal, several factors drive the price of silver. In addition to macro influences, which drive the precious metal complex, silver is driven by sentiment and historical price changes. Silver is quoted in US dollars and is considered a hedge for future inflation.

Silver commonly rallies when the dollar trades under pressure. You can see from a 25-year monthly chart of silver prices set against the US dollar, that when the dollar increases in value, silver prices generally decline and vise versa. Statistically, you might consider silver and the US dollar negatively correlated.

How is Silver Viewed on a Macro Basis?

In addition to consumption as an industrial metal that is experiencing higher demand for PV, silver is used as a precious metal. Precious metals such as gold and silver are often thought of as currencies that trade against the US dollar.

When capital markets are experiencing volatility due to a recession gold and silver are often used as a safe-haven. Additionally, when inflation is rising, and interest rates are climbing silver and gold are considered a hard asset that is immune from rising inflation expectations.

As mentioned, prior, silver is priced in US dollars, as the value of the dollar falls, the value of Silver climbs for investors who have a base currency that is not US dollars. Many investors use the dollar as a short-term benchmark to determine the future direction of silver prices.

Is Silver a Good Investment?

Silver is a good investment for several reasons.

  • Assists in the diversification of your portfolio.

  • It can be used to hedge future inflation.

  • It is viewed as an industrial and precious metal.

Silver is an excellent investment vehicle and can assist in helping you diversify your portfolio. Historically, silver is uncorrelated (does not move in tandem) with stocks and bond prices and viewed as a safe-haven asset. Assets like silver are also seen as a hedge to future inflation making the shiny metal and attractive candidate for fixed income investors.

How to Trade Silver

There are several ways to trade silver. The four most common include:

  • Futures contracts

  • Contracts for Differences (CFDs)

  • Exchange-Traded Funds (ETFs)

  • Physical Silver Bullion

Futures Contracts

One of the most popular is futures contracts. Silver futures contracts are popular because they are liquid and facilitate smooth execution. A futures contract is a silver unit that must purchase or sell a specific asset at a certain date in the future.

how to trade silver

Daily futures volume on the Chicago Mercantile Exchange (CME) is approximately 60,000 contracts. Each silver contract is worth 5,000 troy ounces. This means that approximately 4.6-billion dollars’ worth of silver is traded on the CME each day.

The price of silver is quoted in US dollars and cents per troy ounce. The minimum price fluctuations are 0.005 per troy ounce or $25 per contract. The spreads are tight at 0.001 per troy ounce. The listed contracts are for 3-consecutive months as well as any January, March, May, and September in the nearest 23 months and any July and December in the nearest 60 months

The silver futures contract listed on the Chicago Mercantile Exchange is physically delivered. This means if you hold the contract beyond the delivery date you are required to take delivery of silver in a CME regulated warehouse. Most of the silver volume traded on the exchange is not taken to delivery. Most traders, exit or roll their position and never take physical delivery. The CME also offers an e-mini contract that is financially settled.

Pros and Cons of Futures Contracts

One of the benefits of trading futures contracts is that the futures exchanges provide margin to customers. This means that you can borrow money to leverage your position and enjoy enhanced returns.

As of April 2020, the leverage on Silver is approximately 8:1. This means for every $1 you post you can borrow $8 to trade. This number will fluctuate based on the volatility in the silver market. Presently the exchange requires that you post $9,000 for each futures contract you trade. This compares to the $72,000 value you would hold from owning a futures contract (5,000 ounces * $14.5 per contract-currency price as of April 2020)

The CME has the right to change the leverage it will offer at any time. If you purchased 1-silver contract, and earned $1, you return would be 55% = $5,000 (5,000 ounces * $1) divided by the $9,000 required to hold 1-silver futures contract. Of course, margin cuts both ways, which means your losses will be enhanced. Futures contracts are also very liquid, allowing you to enter and exit positions seamlessly. The downside of trading futures is elevated costs. You will need at least $9,000 to post the initial margin needed to buy one contract.

Contracts for Differences (CFDs)

Another popular way to trade silver is through the over the counter market which includes contracts for differences. Many forex brokers provide CFDs.

A contract for difference is a product that allows traders to use leverage to trade silver. You don’t own silver, instead, you are entitled to the difference between where you purchase a silver CFD and where you sell a silver CFD. A contract for difference tracks the movements in a specific silver benchmark. You are only responsible for the difference between where you purchase the CFD and where you sell the CFD. Generally, the leverage on a silver CFD is approximately 10:1. For example, $1 you post you can borrow up to $10 to trade a silver CFD.

CFDs are liquid and provide ample leverage, but you have additional risks. CFDs are not legal in the United States. You also are taking the risk that your broker will be solvent which means that you are taking credit risk.

Exchange-Traded Funds (ETFs)

You can also trade a Silver ETF to trade the silver market. An exchange-traded fund on silver is a trust where the administrator purchases silver futures and silver bullion and holds it in a fund. An individual investor can then purchase the security which tracks silver futures prices and bullion.

ETFs are liquid and trade actively during market hours. Most ETFs are traded on regulated exchanges which minimizes credit risks. While silver ETFs hold futures contracts and bullion, they do not always track the underlying movements of the commodity tick-for-tick.

silver cfd trading

Silver Bullion, Bars, and Coins

The most common forms of physical silver are bullion, bars, and coins. You can purchase silver online or at several different dealers. If you plan to purchase a lot of physical silver, you should consider holding it in an official silver vault. The CME provides several official vault operations. Alternatively, you can store your silver in your home or safe deposit box.

While owning physical bullion substantially reduces credit risks, the liquidity is much lower than the liquidity of futures contracts, CFDs, and ETFs.

Silver Options

If you are interested in trading options, they are available on futures contracts as well as ETFs. Some CFD brokers also offer silver options on CFDs. A silver option is a right but not the obligation to purchase or sell a silver futures contract or ETF someday in the future. There are two basic types of silver options. A call option is the right to buy silver at a specific price on or before a certain date. A put option is the right to sell silver at a specific price on or before a certain date. When you trade options, the buyer pays the seller a premium for the right to either buy or sell silver.

Silver Trading Strategies

There are several ways to trade silver. Many investors view silver as an asset that will help diversify their portfolio and will use a buy and hold strategy. You can pick a specific percentage of your portfolio that you want to be exposed to silver and readjust that number regularly.

Many analysts also use fundamental and technical analysis to determine the future price of silver. Fundamental analysis includes supply and demand as well as macro influences. Technical analysis is the study of past price movements.

In addition to looking at silver supply and demand as well as the macro outlook, you can trade silver relative to gold.

During the past 20-years, the ratio of gold to silver (Gold/Silver) remained in a range between 45 and 85, breaking down during the European financial crisis and surging higher during the COVID-19 crisis. Silver generally outperforms gold during periods of higher expected GDP and underperforms during recessions.

Gold Silver Ratio Chart

Technical Analysis

You can also use several different technical analysis tools to determine the future price of silver. This would include moving average trend following strategies, overbought and oversold strategies, and momentum strategies. This might include a moving average crossover trend trading strategy, an RSI or Stochastic overbought and oversold strategy, or a MACD (moving average convergence divergence) crossover strategy.

Sentiment

Sentiment can be measured in several ways. One of the most popular ways to evaluate sentiment is to look at overall futures positions. Every week the Commodity Futures Trading Commission releases their commitment of trader’s report. Within this report, you can see the aggregate positions of managed money, commercial traders, and retail traders. Many traders focus on managed money or hedge funds. When these traders are too long or too short the market can become volatile and move quickly. When the positions are equal the market is usually in equilibrium.

The Bottom Line

Silver is a very liquid precious metal that also has some industrial uses. You can trade silver coins, silver bullion as well as silver derivatives such as futures, CFDs, and ETFs. The price of silver generally accelerates faster than gold both on the upside and downside.

Several factors will affect the price of silver. Geopolitical risk, inflation, and the dollar will drive prices over the long term. When market liquidity declines or volatility in riskier assets rises silver is used as a safe-haven. Silver is often viewed as a currency versus the dollar and will rise when the value of the greenback declines. Technical analysis will help drive the price of silver along with sentiment which can be a key instrument in determining future price moves.

Silver is also traded actively against gold. You can trade this ratio by selling gold and buying silver or the reverse. Over the past few years, silver has been in a downtrend relative to gold prices which can be viewed as a ratio by dividing the price of gold by the price of silver.