History of Silver Coins & Bullion
People in the older times did not use any form of currency to purchase the things they needed. They just traded their goods at the market place and exchanged things they had for things they wanted or needed. As time passed, people began to learn the value of currency. They started to use money as an instrument to purchase goods and services. Because silver has always been considered a valuable commodity, they minted silver coins as their first currency many hundreds of years ago.
Roman silver coins served as an important means of political propaganda. The Romans also used silver coins as a powerful way of paying their legions. These coins were used for most daily transactions by administrators, traders and for army pay.
In 1792, silver assumed a key role in the United States monetary system when Congress based the currency on the silver dollar, and its fixed relationship to gold. Silver was used for the nation’s coinage until its use was discontinued in 1965.
Paper Silver
Paper silver or silver futures can be a confusing subject for many people. After all, what does it have to do with how to buy silver? To understand silver futures, one needs to understand what a futures contract is.
What is a Futures Contract?
A futures contract is a contract, traded on a special stock exchange called a futures exchange. The idea is to buy or sell, what is called, a certain underlying instrument, in this case silver, at a certain date in the future, at a specified price. Basically it is a bet that something will be worth something at sometime in the future. This gives new meaning to the word nebulous as no one can predict with accuracy what the value of a commodity will be at some date in the future. You can, of course, find heaps of experts that give advice or guidance but, intimately, no one really knows what the price is going to be.
Obligations of a Futures Contract
A futures contract is different to an option. Whereas with an option the holder simply has an option to buy or sell, the futures contract contains, as part of the contract, an obligation. You are required by law, in other words, to pay.
Both parties of a futures contract must fulfill the contract on the settlement date unless you opt to roll over in to the next months contract. Then cash is transferred from the futures trader who sustained a loss to the one who made a profit. Most futures trading is done on a cash settlement basis these days.
What are Silver Futures?
Silver futures are simply futures contracts where the commodity is silver. This is usually in the form of weight.
Futures contracts, or simply futures, for silver are usually 5000 troy ounces, One would trade in parcels or multiples of 5000 troy ounces, and the exchanges clearinghouse would act as counterparty on all contracts, setting margin requirements, and so forth.
Silver futures and options, currently trade on many exchanges around the world. In the U.S. it is primarily traded on COMEX (Commodity Exchange), a subsidiary of the New York Mercantile Exchange. Other major trading countries all have own futures and options (called derivatives) trading floors.
In short, silver futures are a bet that the price of silver is going to be at a specific price at some time in the future. This could be a high or a low price. If you are wrong you have to cough up the money, if you are right, you get the funds to the value of the current silver price on settlement day from the other trader
How Does a Silver Futures Contract Work
You simply agree to buy, say for example 5000 ounces of silver, in three months to the day at 16 dollars per ounce on that day. That future date is called the delivery date or final settlement date. The pre-set price is called the futures price. The price of the underlying asset on the delivery date is called the settlement price. If an ounce of silver on that day is worth 20 dollars, you win as you are only paying 16 dollars for an ounce of silver that is considered to be worth 20 dollars. You would have made 4 dollar an ounce profit, and the seller loses as you are only paying 16 dollars for something that is worth 20 dollars. If the price of silver goes down in the interim to 13 dollars, then you will find yourself paying 16 dollars for something worth only 13 dollars. That is a nasty situation to say the least. You will have lost money! Of course you do not get the silver. It is all a cash transaction so you cannot, if you lose, collect the silver and hold onto it in the hope it will go up again and you can sell it. However you can roll it over into another contract.
The big issue here is the leverage. You don’t have to pay up front all that you are buying, only a percentage of between 1 and 10 percent. Of course if you win you can win a lot of money. Most people lose and that means they do not just lose the percentage of dollars they put down but the entire amount they bet.
You have to have sufficient funds to back up your call so you can ride out the dramatic changes that can occur from one moment to the next.
This is all done on a cash basis in most markets and in practice you would be working with a dealer so there is no “taking the silver and run.”
This explains why silver futures traders are usually professional dealer with large capital bases who are buying and selling for large institutions, and even they can lose big time.
Quite honestly you would probably have a better chance of winning at the casino.
Conclusion
There are pro’s and con’s to each type of silver mentioned above, and as a footnote I have attached a link to a story that explains the recent accusation of JP Morgan’s manipulating the silver futures market.
http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2010/3/30_Andrew_Maguire_%26_Adrian_Douglass.html What do you think about this?
Reference:
Silver Futures
ArminVoigt Via ProBlogPartners™
April 3, 2010
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