Futures contracts, which are agreements to exchange an asset like silver for a set amount of cash, trade on public exchanges. The Commodity Exchange, or Comex, is the subsidiary of the Chicago Mercantile Exchange (CME) that creates and provides trading facilities for several different types of silver futures contracts. The standard Comex silver futures contract specifies the delivery of 5,000 troy ounces of the metal for a predetermined price and time period. The silver is stored and exchanged at one of the CME-authorized depositories scattered throughout the country. Only silver that meets the CME’s exacting standards is eligible for storage in an authorized depository.
To be eligible for storage in a CME-authorized depository, silver must be 99.9 percent pure. For the standard 5,000-ounce futures contract, the silver must be cast into bars weighing 1,000 troy ounces, give or take 6 percent. Each silver bar must be marked with its weight, purity, a serial number and the brand of the refiner. Only brands officially listed by the CME can be eligible for storage. Should a refiner deliver silver that is below standard, the metal is rejected or sold, and the refiner risks losing its authorization to warehouse silver for Comex futures.
Eligible silver stored at a CME-authorized depository is not available for sale unless it is registered. An owner can register eligible silver deposits by having the depository issue a warrant that certifies the details of ownership. Silver warrants were once printed on paper, but were converted to electronic form in 2011. Not all eligible silver is registered for sale, but all registered silver must first be eligible. Silver owners frequently extend or withdraw registration depending on whether or not they wish to sell their holdings at current prices.
Silver Futures Contracts
The Comex offers silver contracts for a fixed number of troy ounces, ranging from “mini” contracts for 1,000 ounces up to the regular 5,000-ounce contract. The terms of the regular silver contract call for physical delivery of the metal during the month following the futures expiration date. The smaller contracts do not involve physical delivery – they are used to bet on silver prices. Purchasers of the regular silver contract can avoid taking delivery by closing, or “offsetting,” their contracts before expiration. A contract purchaser offsets the contract by selling an identical contract -- the two contracts cancel each other out and relieve the trader of further obligation.
Silver traders and analysts pay keen attention to the amount of silver housed at Comex depositories. Bloomberg publishes daily updates disclosing the Comex silver inventory levels. In February 2013, Bloomberg reported that Comex silver levels stood at just over 160,000 ounces. Futures traders monitor these inventories to help estimate silver price trends. For example, a sudden change in registered silver inventory might presage a new price trend for the metal, causing other silver owners to change the status of their inventories from registered to eligible in order to gauge increased or decreased demand for silver.
- Rich Dad's Advisors: Guide to Investing In Gold and Silver: Protect Your Financial Future; Michael Maloney
- Trading Futures For Dummies; Joe Duarte
- Following theTrend: Diversified Managed Futures Trading; Andreas Clenow
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