Silver futures

Silver is in high demand in India for several reasons – it’s considered auspicious, is a relatively good store of value, and a good investment. Most of the metal is used for jewellery, ornaments, and cutlery but, it’s also useful for many industrial and scientific applications, in electronics, medicine and so on. In the past, silver was used as currency, in the form of coinage. In India, silver is also consumed literally – a layer of thin silver foil is considered a must for many sweets! People also think of silver futures investing as an option to create wealth.

Silver production and consumption

Most of the silver is produced in countries like Peru, Bolivia, Mexico, Chile, Australia, China and Poland. Silver is usually found combined along with other metals, so it is mainly obtained from copper, nickel, lead and zinc mines as a byproduct of electrolytic refining of these minerals.

India is the biggest consumer of silver in the world, even though domestic production is quite small. The biggest producer in the country is Hindustan Zinc Ltd, producing over 600 tonnes in 2018. That’s around 95 percent of the country’s production.

The biggest producer, Mexico, accounted for 5,600 of the 38,223 tonnes produced in 2017. Unlike gold, most of which is recycled, much of the silver is lost because it is used in small quantities in industrial production and cannot be recovered for recycling.

Silver demand and prices

Silver futures, like gold, is seen as a relatively safe investment. When the economy goes into a downturn, people tend to exit from equity and put in precious metals like gold and silver. Since silver is useful as a hedge against inflation, demand and prices could go up during inflationary times.

Many factors affect silver demand and prices. In India, the monsoons can have a significant effect on silver demand and hence prices. A weak season will mean less money in farmers’ pockets, and they will thus spend less on non-essentials like silver. The state of the economy will also affect silver demand and prices.

Times of uncertainty will also affect silver demand. During times of war or civil unrest, people will hold on to the precious metal because it is portable, does not need documentation and is universally accepted.

The US dollar too affects silver prices. A weakness in the dollar is seen to be symptomatic of a weak economy, and investors will instead invest in silver rather than in economic activity.

Silver futures

As seen above, there is considerable demand for silver as an investment, especially in India. But, there is another way of investing in silver without having to purchase the metal. Purchasing silver can be fraught with problems because of issues involved in ensuring security and the purity of the metal. To get around this problem, you can invest in silver futures.

Globally, these futures are traded on commodity exchanges like the New York Mercantile Exchange (NYMEX) and the Tokyo Commodity Exchange (TOCOM). In India, these are traded on exchanges like the Multi Commodity Exchange (MCX). Silver options are also available for trading on the exchange.

For silver futures investing, you need to take the services of a broker, who is a member of the commodity exchange. Before trading, you need to pay the broker an initial margin. That is, you have to pay a certain percentage of transactions you carry out on the exchange. Margins are generally low in these futures.

Let’s take an example to explain the concept of margins. If the margin is 5 percent and you want to trade in futures worth Rs 1 crore, you will have to pay the broker Rs 5 lakh. So for just Rs 5 lakh, you will have Rs 1 crore. The large volume of transactions means more opportunities for profit. Of course, if your price calculations go wrong, this leveraging could mean considerable losses.

Silver futures investing is accessible to smaller investors too. Since these are available in different sizes like 30 kg, 5 kg, and 1 kg, it’s possible to make smaller investments. You don’t have to hold them until the expiry date. You can square off your position any time before that if you feel that silver prices are not moving to your advantage.

Advantages and disadvantages

There are many benefits of silver futures investing. One is that it’s an excellent instrument to hedge against other investments. Since silver generally moves in the opposite direction to equity, you can offset losses in your capital with gains through futures. You can gain from price movements in silver without having to take delivery of the metal and worry about security and purity. Since these futures are actively traded, you don’t have to worry about liquidity.

The disadvantage is that the low margins could induce you to overextend yourself and run the risk of incurring huge losses. It could also be challenging to deal with the volatility in silver futures and find the right moment to book profits or cut losses.

Conclusion

So, is silver futures investing a good idea? That depends on several things. One is you can keep leverage under control and not get in trouble when prices move adversely. Another thing is whether you can stay abreast of happenings across the world since a change in demand and supply in any part of the world can affect silver futures. You should always keep track of live updates on silver futures either on TV or the Internet so that you are ahead of the curve. If you keep these factors in mind, you can look to a bright `future’.