Understanding how silver futures trading works is integral to understanding what moves silver prices.
The quoted price of silver is typically not the spot price of silver – the price of immediate delivery. Rather, it's the price of the most actively traded futures contract for the delivery of silver in later months.
Manufacturers may use these contracts to lock in future silver prices without having to contend with silver price volatility. Silver dealers may use them to hedge against sharp, unexpected declines. And speculators may just buy up these contracts to make quick profits on violent price movements.
Silver futures trading involves many players and it ultimately is what determines the price of the white metal.
Here's how silver futures trading works…
Silver Futures and Margin Accounts
Rather than buy silver coins or silver bars, a trader can use silver futures to profit off silver price increases – or in many cases, decreases as well.
This is all done through margin trading accounts. Margin accounts are offered by brokerage firms and allow traders to borrow money to purchase assets.
A prospective silver trader will go to a broker and ask to buy a contract for the future delivery of silver at the quoted price. Underlying each contract of silver is the promise to deliver 5,000 ounces of silver during a certain month.
For example, if the quoted price for an ounce of silver is $16, each contract will be worth $80,000. Margin trading allows a silver futures buyer the ability to put down a fraction of the cost of that contract, while still being afforded the ability to take gains on positive price movements.
They'll put down what's called a maintenance margin in their margin account. This is the amount the trader will have to deposit into their account to hold open a position in a silver futures contract.
Let's say the margin is 10%. The silver futures buyer will have to deposit $8,000 into their margin account.
A peculiar thing about futures trading, and this applies to all commodities, is that they are typically cash settled. The underlying silver is rarely delivered. Margin accounts are credited or debited to maintain a margin that is in line with the daily price movements – they are marked to market.