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Today's Featured Article
There has been an overload of talk about gold futures as a safe-haven investment during the current recession, but the silver market is often overlooked. Silver futures follow the same pattern as gold, strengthening on a weaker U.S. dollar. Recently however, the outlook for silver has some analysts believing that it will outperform gold due to a number of additional factors, including industrial demand.
Until prices exploded higher in late 2003, silver was not a favorite among many traders. Since then, in addition to the current weak dollar, the main changes in price have been caused by the consolidation that has taken place in the gold and copper industries and the difficulty in developing new sources of production. As much as 75% of silver's production comes from gold, copper, lead, and zinc mining which is why changes in these other industries have a large impact on the price of silver.
From 1989 to 2003, silver futures traded mostly between $4 and $6 per ounce until taking off on an uptrend for almost five years. Post-9/11 was a beneficial era for most commodities, and silver did very well up until the financial panic of late 2008.
According to the most recent research by the Silver Institute, the cash cost of producing silver is somewhere around $4.50 to $5.30 an ounce.
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Global Supply and Demand for Silver
According to the Silver Institute, total global silver fabrication slipped 0.9 percent in 2008 to 832.6 million ounces (Moz). Even though industrial demand dipped slightly by 1.4 percent to 447.2 Moz, the 2008 performance was the second to 2007, with most of the loss occurring in the fourth quarter of 2008. Jewelry fabrication dropped by 3.2 percent to 158.3 Moz in 2008, the product of weaker production in Italy and Thailand. Growth was seen mainly in India, China and Russia. Silverware demand fell by 2 percent in 2008 to 57.3 Moz, as losses in western markets were partially offset by gains in India, which witnessed a 7 percent rise, as well as Russia, which also saw growth in
consumption last year.
Global silver mine production grew by 2.5 percent in 2008, driven by strength in the gold and lead/zinc by-product sectors to 680.9 Moz, the sixth year of consecutive growth and 77 percent of total supply last year. Bolivia's output more than doubled over 2007's performance, and Russia experienced a 24 percent gain in mine supply last year. Peru was again the world's biggest silver mining country in 2008, followed in the rankings by Mexico, China, Australia, and Chile. Last year, silver generated at primary mines - where silver is the main product mined - posted a 1 percent decline to account for 28 percent of total mine production. Cash costs at primary silver mines rose to $4.53 per
ounce in 2008, due to inflationary input cost pressures and diminishing base metal by-product credits.
Contract Specifications
For newer traders, reading about precious metals is sometimes confusing because one source refers to troy ounces and another uses metric tons. There are 32,150.7 troy ounces in each metric ton.
Silver has two contracts trading at the eCBOT and one at the Comex. The standard contract is for 5,000 ounces, which is traded at both exchanges, while the eCBOT has a mini for 1,000 ounces. Silver is traded in dollars and cents per ounce like gold. For example, if silver is trading at $10/ounce, the standard contract has a value of $50,000 (5,000 ounces x $10/ounce), while the mini would be $10,000 (1,000 ounces x $10/ounce).
The tick size is $0.005 per ounce, which equates to $25 per standard contract and $5 for the mini contract. The market may not trade in a smaller increment, but it can trade larger multiples, like pennies. Like gold, the delivery requirements for both exchanges specify vaults in the New York area. The most active months for delivery (according to volume and open interest) are March, May, July, September and December. Also like gold, silver has position limits set by the exchanges.
Exchange margin requirements are $8,100 for the standard contract and $1,620 for the mini contract (as of 8/11/09).
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Silver has been higher, mainly on a dollar slide amid better physical demand, both of which are occurring in the present environment. Certain economic reports such as the stronger-than-expected productivity numbers released on Tuesday by the Labor Department also lend strength to silver futures. These situations lend themselves to potential trading opportunities.
Based on the chart below, we are expecting to see Comex silver test old resistance near 14.000, which coincides with its current trend line. Our recommendation is to buy Comex silver within the green target area. Set a stop-loss around 13.700, or based on your risk tolerance. If we get stopped-out of this trade and the market breaks its current trend line, it will most likely make a move lower to test the 13.200 level. If the 13.200 level holds support, we'd recommend looking for a re-entry point into the market on the long-side.
For a more advanced trade recommendation on this market,
contact us.
September Comex Silver, Daily
If you cannot view the Silver chart, go here.
Source: DTN ProphetX
Disclaimer: The risk of trading can be substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results. Futures trading involves risk of loss. Trading advice is based on information taken from trades and statistical services and other sources which R.J.O'Brien believes are reliable. We do not assure that such information is accurate or complete and it should be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no assurance that the advice we
give will result in profitable trades. All trading decisions will be made by the account holder. Past performance is not necessarily indicative of future trading results.
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About the Author
Jordan Luckey
is a Futures and Options Trading Consultant at RJO Futures. He received his bachelor's of science in Commerce: Finance Concentration from DePaul University in Chicago and is Series 3 Licensed. Jordan developed a passion for the futures markets while taking courses in college focused on futures and options. He also wanted to be able to help individuals with their finances using alternatives other than equity-based securities such as stocks, mutual funds, and ETFs. He enjoys the excitement and rapid pace of the industry, and the fact that it gives one the opportunity to prosper in any economic environment. Jordan's skills include implementing futures and options strategies based on an
individual's current portfolio composition, risk tolerance, goals and expectations. He joined RJO Futures because they are one of the most credible and well-established firms in the futures industry.
RJO Futures is the private client division of R.J. O'Brien, one of the oldest FCMs, tracing its history back to 1914. |
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