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Silver Trading

As with trading gold, there are many different ways to trade in silver, of which silver futures is just one. Whilst futures are an excellent way to trade, they can be complicated to understand and in addition your broker may require evidence that you have some years of trading experience behind you, before accepting you as a client. In the last few years, all the regulatory authorities have tightened the rules on the broker/client relationships and this is one area that has received particular attention due to the dangers of trading on margin with a leveraged account. Whilst this is one issue, another is the complexity of the futures terminology, which can be confusing to the beginner – so what are the alternatives? Well here are just a few.

The first, and perhaps one of the most popular for retail traders and investors is to use spread betting as a more straightforward way to access the silver markets. Spot silver prices are quoted as a two way “spread” and you either buy the spread to go long if you believe that the price will rise, and sell the spread if you believe the price will fall. I have recently developed a dedicated site which explains all the issues and underlying principles for spread betting, so if you would like further details please just follow the link here – financial spread betting explained. All the major spread betting companies offer a wide range of commodities to trade, including silver,gold and oil, so you shouldn’t have any problems finding a company and opening an account. For UK residents spread betting is designated as tax free so there is an extra benefit in trading using this method! I also explain the advantages and disadvantages of trading using spread betting as against futures.

Alongside spread betting are ETF’s or exchange traded funds which are very similar and essentially derivatives that track the price of silver. One of the most popular is the iShares Silver Trust, ticker SLV, launched in April 2006, and sponsored by Barclays Global Investors. The ETF trades on the NYSE Alternext US LLC ( formerly the American Stock Exchange), and as from the 4th December 2008 is now listed on the NYSE Arca.

The next way to trade, and perhaps less well know is to use fixed odds trading. As you may know, when you use spread betting, your trades are leveraged which means you can make and lose money very quickly, and indeed lose more than initial trading capital. Fixed odds trading is an ideal way to start if you are a novice trader as the underlying principle is one of using a fixed amount on each trade, before the position is opened, so you will always know exactly how much you will will, or lose, before the position is opened. The account is not leveraged on margin and all the major markets are available to trade including gold, oil and currencies. This is an excellent way to trade as a beginner as the method automatically limits your losses, so you do not have to worry about margin, money management, stop losses or leveraged trades. If you would like further details please follow the link here – fixed odds trading explained. An alternative to fixed odds trading is binary trading, sometimes referred to as binary betting. This is a derivation of fixed odds, but again your losses are limited. If you would like details of this please just follow the link here – binary betting explained.

For those of you who prefer the world of futures and options, then silver options are certainly an interesting way to trade, but as with futures, you need to fully appreciate the risks before rushing in to trade. Options trading, can seem very complicated to the novice trader, and if you have never traded in them before, I would urge you to visit another of my sites which explains how they work and how to get started ( online options trading ). A silver option, in its simplest form gives you the right to buy ( but not the obligation) a specific amount of silver at a fixed price on a pre-determined delivery date. Now the principle difference between an options contract and a futures contract, is that as an options holder you do not have to buy the underlying silver, so your risk is purely limited to the premium you have paid for the option. Whilst buying options can seem attractive in that your downside risk is limited, options are a wasting asset, and as each day passes, your option will lose a little value, a process that speeds up as the option expiry date approaches, which works against you, and works for the option writer ( or seller). If you write ( or sell ) silver options, then you have an obligation to deliver ( or receive ) the underlying contract. The key point to remember with all options and futures trading, is that you are trading the volatility, not the price. One of the most popular silver options contracts is on the COMEX exchange at NYMEX. The ticker symbol is SI, and a variety of monthly and quarterly options are available.

An alternative way to use options to trade silver would be using equity options with the underlying silver stock as the asset, so let’s look at some of the opportunities for silver related stocks around the world. The largest silver miner by some distance is of course BHP Billiton, whilst among the top mining companies producing silver as part of the extraction process are Kazakhmys (KAZ)  and old favourite Rio Tinto (RIO ) both of which are constituents of the FTSE 100. For international traders both Pan American Silver (PAAS) and Silver Standard (SSRI) would be of interest, both being very liquid and big producers, whilst Helca Mining (HL) would be another. Finally, in Canada I would consider both Silver Wheaton (SLW) and Western Silver (WTZ). Whether you use mining stocks or related mining services, you will need to do your research carefully and start by looking at the overall market, then the sector itself and then “drill down” into the stocks and shares themselves to identify buying opportunities for the medium to long term. If you would like my own personal guide to stock selection, please follow the link here – best stocks to buy.

A further group of assets for silver are the precious metal unit trusts or mutual funds. There are many funds and unit trusts to choose from in both the UK and the US, and if you would like some help with choosing the best mutual funds, please just follow the link here which will take you to another of my sites. Now, when you invest in mutual funds, please understand that one fund can have a very different profile from another, so let’s look at just two, Vanguard Precious Metals & Mining ( VGPMX), and Permanent Portfolio (PRPFX) both of which received five star ratings from Morningstar. The first of these is heavily stock based, and in the last 6 months the price has fallen from a high of $40 to $12! If you would like to see the daily chart please just follow the link. If we look at Permanent Portfolio, although this too has had a fall, from around $38 to $32, it is nothing so severe or dramatic as for the first – again I have provided a link to the daily chart. The primary difference between the two is the balance of risk – Vanguard’s holding of stocks is approximately 97% of the fund. I hope I have made the point.

Finally you can trade silver using one of the many silver/gold indices which in essence are a basket of stocks in the precious metals mining sector. As a result the index smoothes out the individual performance of gold and silver stocks, providing a broader index based performance to the sector. The two most popular are the AMEX Gold Bugs Index (HUI), which trades on the NYSE, and the XAU which is listed on the Philadelphia Stock Exchange. The biggest difference between the two indices is that the AMEX Gold BUGS Index is comprised exclusively of mining stocks that do not hedge their positions more than a year-and-a-half into the future. Because of this, the HUI tends to be more profitable than the XAU when prices are rising. However the downside is that your losses will accumulate more quickly when the price of silver declines.

Join me in my free live trading rooms where I trade silver,gold and other commodities – I look forward to seeing you there – Anna