Silver is considered one of the most valuable commodities in the world. They are traded by various investors and traders. Some of the major silver trading venues include the futures market, forex, and the stock market. In today's article, we'll discuss why you should consider adding silver to your list of assets to trade, as well as break down what it's like to trade silver.
Why trade silver?
Silver is a coveted precious metal with a long history. Silver has many different uses. The two most common uses for silver include its use in jewelry and industrial products. In addition to its practical uses, silver is often seen as a store of value. As such, it is an important commodity that many traders and investors should include in their portfolio.
Silver trading is popular with both day traders and passive investors. Short-term traders will look to capitalize on daily price fluctuations in the silver market. Long-term investors may include silver in their investment portfolio to hedge against adverse stock market movements, or they may simply want to protect themselves from a depreciation of the currency.
During economic turmoil in the market, most stocks will fall. Thus, traders usually have nowhere to hide when black swan events appear in the market. Dedicating a portion of your portfolio to the metals market, especially the gold and silver commodities market, can help you mitigate some of these risks.
This is because the price of gold and silver can rise during times of turmoil as traders and investors shift from risky assets to safer assets such as precious metals. At the same time, gold has a stronger feedback to the stock market than silver.
There is also a fairly significant group of market participants who have less and less confidence in the ability of their government and central banks to manage the money supply. These precious metals investors are in favor of investing most of their holdings in gold and silver bullion. From time to time, these investors may raise prices in the metal markets.
Silver futures trading
Many traders prefer to trade silver in the futures market. Some of the benefits of trading silver through a futures exchange include increased transparency and standardized contract prices. Also, in the futures market, a trader can just as easily take advantage of going short as well as going long. There are several major trading exchanges that offer silver trading. One of the most famous is the COMEX exchange, which is now under the auspices of the Chicago Mercantile Exchange, CME Group.
There are three main types of silver futures contracts available through the CME. The exchange includes a full size silver contract, an E-mini silver contract and a micro contract.
- The full silver contract consists of 5,000 troy ounces of silver.
- The size of an E-mini silver contract is half of a full silver contract, so it contains 2,500 troy ounces of silver.
- And finally, the smallest silver contract on the CME, the micro contract, consists of 1,000 troy ounces of silver.
These different denominations allow even a trader with a small deposit to participate in trading silver futures.
Below you can see a chart of CME silver trading volume.
Now that we have outlined the different types of silver contracts that can be traded on the CME, let's illustrate with an example of what the implied values would be for different contract sizes. Assuming the silver price is currently $20, here is what the contract value would be for each of them:
- A full silver contract of 5,000 troy ounces times $20 equals a contract value of $100,000.
- The E-mini silver contract is 2,500 troy ounces times $20, which equals the price of a $50,000 contract.
- Microsilver contract - 1,000 troy ounces times $20 equals the price of a $20,000 contract.
Based on the silver price of $20, we can see what the notional value of the contract will be. Basically, when we talk about the value or notional value of a silver contract, we are referring to the total amount of silver that we control for each type of contract.
But this is not necessarily the amount of funds that we will need to invest in order to trade one silver contract. This is because in the futures market, we can use leverage to open our positions. This can significantly reduce the amount of initial capital required to control a single contract. Thus, we can increase our profit from silver trades with this opportunity available in the futures market.
The CME generally sets the minimum initial and maintenance margin required to control a single silver contract. Depending on market volatility , this margin requirement will change from time to time. Futures brokers can also set lower margins for their clients who are interested in day trading silver. In any case, the minimum margin required to trade will only be a small fraction of the face value of the contract.
Silver traders in the futures market should be aware of the associated settlement process. In other words, you want your trades to either be paid in cash before the contract expires or rolled over to the next delivery month.
Silver trading and investing with ETFs
Another way for traders and investors to participate in the silver market is through exchange-traded funds, commonly referred to as ETFs. ETFs trade similarly to stocks, but consist of a basket of similar instruments.
For example, there are silver ETFs that are made up of physical silver bars. In addition, some silver ETFs are made up of various silver mining companies. Last but not least, there are silver ETFs that focus on buying silver futures contracts with varying contract expiration times.
So, when we talk about investing through silver ETFs, there are many different options to choose from. The best silver ETF to trade will depend on your personal preference and knowledge of the market.
Although silver ETFs are not as versatile as silver futures contracts, they are nevertheless a good choice for traders who are used to trading in stock market conditions. Since the vast majority of people got their start in the world of investing through the stock market, it serves as an excellent starting point for your silver trades.
Here are three silver ETFs to consider:
iShares Silver Trust (SLV) - SLV is the most liquid silver ETF available for trading on the market. Its main reserve is physical silver bullion. SLV reference prices are obtained from the London Bullion Market Association. In the chart below, you can see the long-term historical performance of SLV based on a net buy and hold model.
Global X Silver Minors (SIL) ETF – The SIL ETF is made up of various silver mining companies. Because it provides access to a basket of silver mining companies, investors can enjoy the benefits of investing in this specialized asset class without undue risk.
Horizon Silver ETF (HUZ) - investing in HUZ provides an investor with access to silver by investing in silver futures contracts for the next delivery month on the CME. It is interesting to note that HUZ is expressed in Canadian dollars. Thus, US investors should consider the currency implications of holding HUZ in their portfolio.
Forex silver trading
An excellent tool for trading silver is the forex market . Unlike the futures market, which may not be available to all participants and may be difficult to physically deliver, the spot forex market offers an easier way to trade silver. The spot forex market is one of the most accessible markets in the world and there are reliable brokers in almost every major country or region.
In the foreign exchange markets, a trader can speculate on the price of silver through a product known as contracts for difference or CFDs . The advantage of CFD is that there is no need to own the underlying instrument. But with CFDs, you can still benefit from fluctuations in the price of the instrument, in this case the price of silver.
Depending on your jurisdiction, you can access different levels of leverage for trading Silver CFDs. Some forex brokers offer leverage of 200 to 1 or 500 to 1 on silver contracts. While others may only offer 20 to 1 or 50 to 1 on these products. You will need to check with your broker or their regulator for the specific leverage limits allowed in your area.
Since forex transactions are not conducted through a centralized exchange, you need to make sure you are working with a reputable broker. Also, it is worth doing some additional due diligence on multiple brokers to see which one offers the most competitive bid -to-buy spreads.
Gold and silver
The ratio of the price of gold and silver is an important indicator closely monitored by the main market players. Before we can go into more detail about the benefits of using the gold to silver ratio for analysis purposes, let's define what it is. This is a fairly simple indicator to understand. Basically, the gold to silver ratio is the amount of silver in ounces needed to buy 1 ounce of gold.
To calculate the ratio of gold to silver, divide the current price of gold by the current price of silver. That's all. Below are some examples of calculating the ratio of gold and silver.
- Assuming the price of gold is $1,500 per ounce and the price of silver is $20 per ounce, the ratio of gold to silver would be 75. In this case, it would take 75 ounces of silver to buy 1 ounce of gold.
- If the price of gold is $1,800 per ounce and the price of silver is $15 per ounce, the gold to silver ratio would be 120. In this scenario, it would take 120 ounces of silver to buy 1 ounce of gold.
So, now that we understand how the ratio of gold to silver is calculated, what can we learn from this ratio? Well, there are several different ways that traders and analysts typically use this information.
When the ratio of gold to silver is relatively high, it means that silver is undervalued compared to gold. And since the gold-to-silver ratio tends to revert to the mean, we expect either silver prices to rise, or gold prices to decline, or both.
At the other end of the spectrum, when the ratio of gold to silver is relatively low, it means that silver is overvalued compared to gold. Again, we expect some reversion to the mean in the ratio at relatively extreme values. So in this case, we expect either silver prices to decline, or gold prices to increase, or both.
The gold/silver ratio analysis mechanism described above is just one of many different analysis methods that can be used. But be aware that the gold/silver ratio can fluctuate a lot and can indeed remain stretched for long periods of time. To get a historical perspective, it is worth noting that over the past 100 years, the ratio of gold to silver has averaged between 45 and 55.
Below you can see a chart of the gold/silver ratio since mid-1997. Note that during this period the gold/silver ratio was around 35 at the low end and around 125 at the high end.
Silver trading strategy
Let's start with a silver trading strategy based on some of the concepts we've already learned. Our strategy will include the gold/silver ratio and the relative strength index. We know that the ratio of gold to silver can give us an idea of the relative valuation of gold compared to silver.
Whenever this ratio becomes excessively increased, there is a tendency for the price of reversion to move towards the mean. As for measuring when the gold/silver ratio reaches an extreme level, we will use the RSI indicator for this purpose . RSI is essentially a technical oscillator that shows the overbought and oversold values of a financial instrument or symbol.
Below you will find the rules outlined for this silver trading strategy. This particular strategy works best on weekly charts.
To set up a long position on silver:
- Watch for the RSI (14) to cross above 70 on the weekly gold/silver chart.
- Buy silver when the RSI (14) returns below 70 on the weekly gold/silver chart.
- Stop loss outside the recent swing low on the weekly silver price chart.
- Target risk/reward ratio of 2:1
The logic behind this long setup is that silver is cheap compared to gold and therefore we expect the price of silver to rise.
To set up a short trade in silver:
- Watch for the RSI (14) to cross below 30 on the weekly gold/silver chart.
- Sell silver when RSI (14) crosses above 30 on the weekly gold/silver chart.
- Set your stop loss above the recent swing high on the weekly silver price chart.
- The target risk/reward ratio is 2:1.
The logic behind this short circuit is that silver is more expensive than gold and therefore we expect the price of silver to decline.
Let's now illustrate the above silver trading strategy using some real market charts.
The top chart is a weekly gold/silver chart along with the Relative Strength Index. The bottom chart is the weekly chart of XAGUSD, which is the silver symbol in the spot forex market.
According to our strategy, we will use the RSI indicator to determine relative extremes in the gold/silver ratio. When we find that the gold/silver ratio is close to the overbought level, we initiate buying silver. Conversely, when the gold/silver ratio approaches the oversold level, we will start selling silver.
Once again, remember that the higher the ratio of gold to silver, the cheaper the price of silver compared to gold. Conversely, the lower the ratio of gold to silver, the more expensive the price of silver compared to gold.
If we look at the gold and silver chart above, we can see where the RSI value hit an upper threshold above 70 and then peaked and started moving lower. The yellow dotted vertical line shows exactly when this condition was met. This event would be our signal to initiate a market buy order in the silver market, in this case XAGUSD.
Now, if we look at the second chart above, you can see where this market buy order would have been triggered in XAGUSD. The stop loss will be placed below the most recent swing low prior to the buy entry point. The stop loss level is indicated by a black dotted line. As for the target, we will use a 2:1 reward to risk ratio as an exit point.
Summing up
Along with gold, silver is one of the most sought after metals in the world. It is in high demand because it is found in many different types of foods and is also highly regarded as a store of wealth. Thus, market participants actively trade and invest in silver through futures, forex, and stock markets.
In addition, in addition to these three main financial markets, there is also a fairly active physical bullion market. Whether you are interested in becoming a gold and silver trader or a long-term buy-and-hold investor, silver trading offers many lucrative opportunities to take advantage of.