A commodity is something for which there is a demand; silver commodities are those which consist of the elemental metal silver. The marketplace for silver commodities includes both cash and futures. Both are traded worldwide. Trading of silver commodities is done by major corporations and mines, hedge funds and futures funds, and by individuals.
Futures contracts on commodities have a fixed size and a fixed life span. Silver commodities contract life spans are determined by the expiry month. Contracts that expire in July and December have a 60-month life; contracts expiring in January, March, May and September have a 23-month life. Most of the trading is done in the “nearby” month, which refers to the contract that has at least a month until expiration. The size of a silver commodities contract is 5,000 troy ounces (155,517.384 grams).
Silver commodities contracts trade on the New York Mercantile Exchange (NYMEX), in increments of 0.5 cents. The actual contract price of silver would not be shown as $30 but as 30.000. The next higher price would be 30.005 and the next lower price 29.995. Thus, each increment is worth $25 for each contract a trader controls. The maximum number of contracts a trader is allowed to control is 6,000, or 30 million troy ounces (933 million grams) of silver.
A contract is a promise to buy or sell the specified amount of silver when the contract ends. Most contracts are bought or sold by speculators, people who are betting on the price going up or down, rather than by people who actually want to own silver. A trader who thinks the price is going down will enter into a contract to sell silver; he is said to be “short.” The trader who agrees to buy that silver is said to be “long,” and thinks the prices will go up. The trader who is long will eventually close his position, going “flat” by selling his contract.
A trader will need to exit his position before First Notice Day, which is two business days before the first of the contract month. Brokers will not let a trader continue to hold a position into First Notice Day unless the trader has enough money in his account to cover the cost of the entire contract. For example, if, on the day before notice day, silver is priced at $30 a troy ounce (31.1 grams), the trader would need more than $150,000 in cash in his account to avoid having his broker close his position. On the other hand, a true silver commodities producer such as a mine would deliver the metal, which must assay 99.9 percent pure.
A trader’s risk is increased if comparatively few contracts are traded. According to NYMEX, silver commodities futures trading averages nearly 109,000 contracts daily. While 109,000 contracts each day sounds like a large number, it isn’t. For comparison, the most popular future on the stock market, the S&P 30mini, trades more than 2 million contracts daily, and the 10-year treasury bond contract trades about 1.5 million contracts daily.
