Spread Betting on Silver
With gold hitting new all-time highs as government debt fears mount, silver’s attractions have gone relatively unnoticed. Its price has fallen sharply from highs in 2010. Traders have come to treat gold less like a commodity and more like a currency. Gold is now being viewed by many as a fourth currency, after the Dollar, Pound and Swiss Franc, and closely followed by the commodity-rich Canadian and Aussie Dollars.
Trading Silver
- Like gold, silver is a precious metal and is considered a form of money and a store of value. However, in 1971, President Nixon put an end to the gold and silver standards in the USA which saw gold and silver losing their role as legal tender in the country.
- China is the biggest consumer of silver and over the last few years have been actively encouraging their citizens to invest in the metal. This could be of the incessant money free printing activity that the USA government has embarked on which has seen the federal reserve increasing its monetary base from $800 Billion to over $2 Trillion. This is basically equivalent to the government issuing $1.2 Trillion out-of-thin air ‘money’ which is prone to push inflation up and lower the purchasing power of existing money in future. This can be further appreciated when one considers that China is the largest holder of USD Treasury Securities which implies that China will be negatively impacted if the dollar loses some of its ‘purchasing power’. And that’s why the Chinese powers are motivating their people to start investing in silver.
- Silver does tend to move more in tandem with gold although it attracts less interest. Half of the demand for silver comes from industrial applications. For instance silver is a good conductor and is used in electronics such as mobile phones and in the pharmaceutical market where it is a natural anti-bacterial metal, this demand has been sufficient to offset the drop from photography films. As such silver is traditionally considered a good recovery play similar to some other industrial metals, like platinum and palladium.
- Silver also has a negative correlation to the S&P 500 [-0.49] but there is very much a high correlation between silver and global money supply, which in practice means that silver is a good hedge against continued quantitative easing programs. You can invest in silver in several ways: bars, coins, rounds, via ETFs, certificates, accounts, derivatives, shares in mining companies or spread betting.
The historic ratio between gold and silver has been 16 to 1, but gold’s meteoric rise has left that ratio far behind, with gold at $1,665 an ounce compared to silver’s $31.50 an ounce, or 53 to 1. To retain the traditional ratio, and if gold is priced correctly, silver would have to rise to $104. Does this suggest that gold is overvalued, silver is undervalued or a combination of the two?
However, with there being a case for gold moving ever higher will silver lag even further behind? This may represent a greater opportunity for speculation. Reasons for gold moving ever upwards could be:
- With the Swiss government already having intervened and stated their intention to take any further action they deem appropriate in devaluing the Swiss Franc, it becomes a less attractive safe-haven for investors.
- The prospect of QE3 devaluing the dollar even further and every opportunity for fear to return to the market.
- The pressure that has been building on cash that has been sitting on the sidelines since the market troughs of late, losing value through high inflation and low interest.
There are caveats. Hedge funds and others shorting and selling sovereign debt have been lining up the ducks and shooting them one by one, first Ireland, then Portugal and Greece, and now Spain and Italy. The EU must act more like a Union, and less like independent states. One course of action that would prove to the markets how unified they were could be the creation of a Eurobond, which would be too big a beast for the shorters to tackle and topple. This may be a hard sell to German taxpayers who will have to underwrite the new Bond. If the UK were part of the EU, they would almost certainly vote against it. Meanwhile monetary easing programmes have supported investment into silver and this looks set to continue in the medium term.
Tips for Spread Betting on Silver
- You can take a position on the silver price using either spot or future bets. Spot contracts mirror the underlying cash silver market and are useful for day trading the metal. Futures are better suited for longer term speculative positions and are normally favoured by speculators prepared to utilize leverage for bigger gains.
- Note that daily spot gold and silver spreadbets expire against the cash price of the respective precious metals. Closing time for the Spot Silver market is 22.00 (London Time). It is important to note that with some spread betting firms will expire daily bets without spread.
- Again, a point is represented by 1/10 of a cent move in the cost of a silver ounce with the margin requirement being around 3% of the effective exposure (if silver is trading at $14, taking the minimum bet of £1 this would equate to an exposure of $14,000).
- If you are considering spread betting silver do consider using guaranteed stops as the market in silver is tiny and very volatile – even more so than gold. This means that when the price slips it can move very fast… Assuming a 5,000 ounce futures contract, a price of $15 represents an exposure of $75,000. In the past when the price of silver was lower a daily modest silver move would have been of the order of $.05 to .10. With a penny move being $50 this gave a spread trader a daily range of about $250 to $500. Today, with the faster trading action and wider price ranges one could expect 20-40 cents a day translating into $1,000 to $1500 for a single trading session. This is why these futures markets are not for beginners.
- Silver usually follows the price of gold but often to a far greater degree which can offer opportunities to traders who don’t mind the extra risk. This implies that silver tends to outperform gold when prices are rising and vice-versa when they are falling. Another tip, instead of getting in at £25 a point for instance, consider building your position up slowly – so for example staking say £5 a point at $11.06, another £5 if the price moves up to $12, another £5 at £13 etc – using the gain on each winning position as margin for the next.
- Spread betting providers make use of hedging in the underlying futures markets in order to cover themselves on the spreadbets they accept, but obviously they do not wish to take delivery of silver or oil, for example. Thus, futures bets that are linked to physical delivery are always settled plenty of time in advance of the actual delivery date on the future. This means that a spreadbet on, say, September Silver might expire in August rather than in September.
- Please note that spread bets are priced on future contracts which trade at a different price to the prevailing cash price. Comparing the cash (spot) price of silver in early March with the futures price of silver say, for delivery in May, we might see that the Daily Spot Silver might be trading at 2003 per ounce while the May Silver might be trading at 2009 per ounce. In this instance the May Silver price is trading at a higher level than the cash price and the difference is not because your spread betting provider has skewed the odds or thinks that the price of silver is likely to rise. In practice, the price of a future is affected by a number of variables which have to account for the cost that would be incurred in storing the physical commodity to the expiry date (also referred to as ‘cost of carry’) as well as market sentiment.
Bearish Proposition: I can only see silver prices increasing in line with the cost of production. No industry has yet emerged to replace the lost silver demand that has resulted from the demise of film based photography – which was by far the biggest consumer. Yes it’s nice to look at but needs regular cleaning so is not even many ornaments made with it these days. It really is a barbarous relic. The VAT rather destroys the investment case for bullion, would you buy anything that has a minimum spread of 20%?
Bullish Proposition: There are a massive amount of new uses for silver and more being uncovered all the time, think solar panels and a multitude of medical uses just to get you started. As for the 20% vat, a lot of countries don`t impose this theft including the USA. There is a major amount of scope for silver to rise substantially, and if as I think the price doubles, trebles or more from here, are really going to worry about the original 20% VAT
Bearish Proposition: Yes, it does have a number of industrial uses but global consumption has only increased by around 15% since 2000 as the decline in film photography has largely offset increased use in pv, electronics and catalysts. If the price were to rise significantly, industries would be able to substitute, increase recycling and reduce their use of silver reducing the demand. It should be viewed as an industrial metal rather than a precious one. Central banks no longer hold reserves of silver, I’m not aware of any society that uses it as a currency, therefore it is not “money”. The massive price spike in recent years was due to a temporary shortage of very high purity silver required for pv which led to misinformation about supply/demand and resulted in a short lived speculative bubble. The price has since reverted to near it’s real long term average and likely to stay there. There’s a lot of misleading information posted on the internet by silver bugs with vested interests – bulllion dealers and the like.
How to Spread Bet Silver
When it comes to spread betting, you probably think first of market indices and stock prices. But spread betting commodities is another powerful profit opportunity. While some people steer clear of trading commodities and futures because of the potential for loss, with spread betting you have a familiar trading interface, and can use your usual techniques to mitigate the losses.
Silver is an exciting metal. Some say it is set to appreciate much more than gold, with which it has kept in a narrowly fixed ratio for many centuries. The reason for this is clear; silver is actually a useful metal and has many industrial applications. Of all the gold ever mined in the world, most of it is still available, in ingots, jewellery, etc. Not so with silver, which has found many industrial uses, and thus is being used up and dissipated. In fact, about 46% of global demand for silver is industrial in contrast to just 9% for gold. As such silver as a price commodity is more aligned with worldwide economic growth, particularly in the electronics field, which accounts for 21% of global demand. It is also worth noting that the world supply of silver is less than a third of the current supply of gold.
One of the well-established uses has been in photography, but even as that need fades with technology, the same technology is demanding silver for other sectors like power generation due to the metal’s high electrical and thermal conductivity. Add to this the fact that silver is usually not directly mined, but is a by-product of other mining operations, and you can see that a shortage of silver is already looming.
Just to emphasize this dwindling supply, the U.S. Treasury held 3.5 billion ounces of silver in the 1960s, the most it has ever held. By 1990 the supply was reduced to 2.1 billion ounces of silver, but by 2010 it held a mere 20 million ounces. This story has been repeated in countries around the world. It hasn’t been generally noticed, perhaps because silver is no longer used to any extent in currency.
A further incidental reason for silver being in short supply is that the scaremongers who worry that the world is coming to an end have turned to hoarding silver coinage, as it is thought to be more easily negotiable than gold when the chaos rules.
Silver prices are traditionally correlated with gold and other precious metals. Even though the price of precious metals fluctuates up and down, these facts indicate that in the long run silver will increase more in price proportionally than gold i.e. silver underperforming on the downside, and rallying more strongly on the upside. It’s worth noting that whenever there is a bull market, such as back in the 1970s, the price of silver increases much more quickly than the price of gold, and with the current world economy there is certainly a good possibility of an increasing bull market in gold. This would seem to indicate that movements in silver prices are dependent largely on market sentiment as opposed to the metal’s fundamentals.
At the time of writing silver is hovering around the $34.81 per ounce level (September 2012) and analysts predict that silver prices will average around $30/oz in 2013. Indeed, if the USA government manages to avert the fiscal cliff silver prices may move down gradually. It is worth noting that over 16,160 tonnes of silver are held in physically-backed exchange traded funds which is about equivalent to 2011’s global supply of silver and 70% of new mine supply. Thus, if the economic situation improves, investment demand may not only decrease, but some investors might be inclined to sell their silver assets which would further pressure prices down.
Now all this discussion is about the physical silver in the world, and commodity trading includes futures, which are basically contracts to supply a defined quantity at a forward date. Just as the “spot” price of silver will increase, forced by supply and demand, so the futures price will go up, but with much more uncertainty and therefore volatility. This makes it a great prospect for spread betting, and all you have to do is make sure that you are on the right side of the bet as much as possible, and keep control of your losses. Of course you could also buy physical silver but in this case just remember that you will incur VAT. If trading silver via spreadbets just remember that despite shortages silver will fluctuate down as well as up, so take care to protect your capital. This is even more important since spread betting is a leveraged trading instrument which means that you could theoretically lose an amount exceeding your account balance.
Betting on Silver
As silver is mainly traded in America, you will find that the prices are based on the US dollar. Most spread betting providers quote silver by the cent. If the current price of silver is around $31; that is equivalent to 3100 cents. In that respect, every pound you bet on silver provides you an exposure of £3,100. The current spot price, that is the price for immediate purchase, is 3105.5 – 3109.5. As these are expressed in cents, they correspond to around $31 per ounce.
If you are bullish on silver in the immediate future, you might place a buy bet at 3109.5 for £2.50 per point. Silver can move in large steps, so you need to be aware of your possible gains and losses. Say the price went up to 3253.2 – 3257.2, and you decided to close your bet and capture your gains.
The way you would work out how much you have profited is by figuring out the difference in points, on which your bet is placed. You bought at the higher price of the pair, so the bet closed at the lower price. The difference in points is therefore 3253.2 minus 3109.5. That works out to 143.7 points.
The stake for your long bet was £2.50 per point. 143.7 times £2.50 gives you a profit of £359.25.
Whenever you are spread trading, there’s a chance that the price will go in the wrong direction, and you will have to close your bet for a loss before the amount rises too high. So you may need to work out how much you are losing, and you would do it like this.
Say you took out the same bet as above, but instead of going up the price went down to 3053.2 – 3057.2. If you are following a trading plan, as you should, then you’ll know before you place the bet what price you should let it go down to before you close the bet and accept your loss. Say you have reached that level and you close the bet at the price of 3053.2.
Now you have the less pleasant task of working out how much the bet has cost you. The initial price was 3109.5, and the price dropped to 3053.2 before you closed the bet. That means that you have lost 3109.5 minus 3053.2 points, or 56.3 points. The stake remains the same, therefore your total loss is 56.3 times £2.50, which is £140.75.
You see in this example how winning traders can make a profit, even if they do not always find winning bets. Depending on your trading plan, you should only be placing bets where you have a chance of winning two or three times the amount that you would lose if it goes the wrong way.
It is easy to see that even if you have average luck picking the direction of price, and are only right half the time, if you adopt this strategy then you will still finish up on top. Even the best spread traders cannot consistently “beat the market” in terms of selecting the right direction every time for their bet, but they finish up on top because the amount they win, when they do, is more than the amount they lose on the failed bets.
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