At FirstGold™ we believe that physical bullion is the best form of saving. While silver futures may seem like you’re investing in a safer future, the reality is that silver futures is just another piece of paper. Is there a silver lining?
A silver futures contract is an agreement between a buyer and a seller to complete a silver transaction for a set price at a specific time in the future. So, in simpler terms, a buyer and a seller negotiate a price for a set amount of silver that they will trade on a prospective ‘due’ date (whether it is months or years ahead) – the market silver price on that due date is irrelevant.
When you enter into a typical silver futures contract, you are committed to purchasing a certain amount of silver at the price you negotiate with your dealer on the due date. However, it is rare for buyers and sellers to actually take delivery of the silver. Most silver futures contracts are bought back or sold for profit before the due date. In the lead up to the date, the majority of futures brokers will actually close the contract trade on your behalf unless instructed otherwise.
Most silver futures contracts are settled in paper money, so trading occurs in contractual obligations rather than solid, physical assets. Profits are made through market predictions. The buyers or sellers must speculate on which direction the price of silver will move in the future. If you correctly predict that silver is increasing in value, you would purchase silver at the current futures price. Your contract will gain value over time because you can sell the silver for a higher price than you bought it for. On the flip side, if you believe the price of silver will go down, then you could sell a silver futures contract and agree to sell silver at its expiration at the higher price of the original futures contract. If you are the seller, you will profit if the silver price does drop as you predicted, because you could buy the silver back for a cheaper price when the expiration date arrives.
Why trade in speculative silver futures?
Silver futures contracts are traded on ‘margin’ – this is their major advantage. Trading on a margin means that only a portion of the value of the contract has to be paid up front. The margin requirements vary from broker to broker and between different asset classes, but still only represent a portion of the price of the silver futures contract. As a result, investors can control a value of silver beyond the initial cash input, though brokers will demand an additional margin if the price of the silver moves significantly in a direction that magnifies potential losses.
This leverage can drive hefty profits, although there is also a risk of equally dramatic losses.