Market Basics » Silver

Description

Silver is a metallic chemical element with the chemical symbol Ag (Latin: argentum) and atomic number 47.

A soft, white, lustrous transition metal, it has the highest electrical conductivity of any element and the highest thermal conductivity of any metal.

The metal occurs naturally in its pure, free form (native silver), as an alloy with gold and other metals, and in minerals such as argentite and chlorargyrite. Most silver is produced as a by-product of copper, gold, lead, and zinc refining.

Silver has long been valued as a precious metal, and it is used to make ornaments, jewelry, high-value tableware, utensils (hence the term silverware), and currency coins. Today, silver metal is also used in electrical contacts and conductors, in mirrors and in catalysis of chemical reactions. Its compounds are used in photographic film and dilute silver nitrate solutions and other silver compounds are used as disinfectants and microbiocides. While many medical antimicrobial uses of silver have been supplanted by antibiotics, further research into clinical potential continues.

Trading Unit

One fine troy ounce, usually quoted in U.S. dollars. The trading unit represents pure silver, irrespective of whether an actual bar is actually pure.

Units for delivery

The "London Good Delivery Bar" is the de facto unit for commercial and monetary transactions. A standard silver Good Delivery Bar, according to the London Bullion Market Association, must contain between 750 and 1100 troy ounces with the bar weight expressed in multiples of 0.10. A Good Delivery Bar must have a minimum fineness of 999.0.

Primary Pricing mechanisms

Fixings, Spot Market, Futures Contracts, Hedging.

Dealers apply premia or discounts to spot prices based on the demand for, supply of, and form of gold product being traded.

The difference between the prices for sale (ask or offer price) and purchase (bid) is the "spread". Spreads can widen if the market:

  • has an imbalance of supply and demand;
  • has poor liquidity (is "thinly" traded);
  • is inefficient.

Differential spreads apply to different forms.

Price Drivers

  • Industrial consumption demand.
  • Real US interest rates.
  • US dollar value.
  • Reciprocal investments (e.g. conventional equities).
  • Crisis hedging.

Supply

Silver supply comes mainly from mine production, which has accounted for about 70% of global supply in the past decade. Recycled silver scrap is the second largest source of silver, totalling about 20% of global supply. The remaining supply comes from producer hedging, government sales and implied net disinvestment.

Some of the biggest silver producing companies traded on North American exchanges by market capitalization data from the Motley Fool and Yahoo Finance include Silver Wheaton Corp., Silver Standard Resources Inc., Coeur d'Alene Mines Corp., and Pan American Silver Corp.

Demand

Industrial use accounts for most of the world's silver demand, according to statistics from the Silver Institute. Industrial uses include production of batteries, bearings, soldering material, electronics switches and fuses, and automotive catalysts.

Other major silver demand comes from investment as well as the production of jewellery, coins, silverware and photo film, although photography demand has been on the decline for several years as digital cameras become more and more popular.

Avenues of trade

Over-the-Counter Market

The OTC silver market includes spot, forward, and option and other derivative transactions conducted on a principal-to-principal basis. While this is a global, nearly 24-hour per day market, its main centers are London (the biggest venue), New York and Zurich.

According to the London Bullion Market Association, members of the London Bullion Market Association (LBMA), the trade association that acts as the coordinator for activities conducted on behalf of its members and other participants in the London bullion market, act as OTC market makers and it is believed that most OTC market trades are cleared through London. The LBMA plays an important role in setting OTC silver trading industry standards.

Members of the London bullion market typically trade with each other and with their clients on a principal-to-principal basis. All risks, including those of credit, are between the two parties to a transaction. This is known as an OTC market, as opposed to an exchange-traded environment.

Unlike a futures exchange, where trading is based around standard contract units, settlement dates and delivery specifications, the OTC market allows flexibility. It also provides confidentiality, as transactions are conducted solely between the two principals involved.

Silver futures are traded on the New York Mercantile Exchange's COMEX division. The Chicago Mercantile Exchange's Globex electronic trading platform trades silver futures, and Japan's Tokyo Commodity Exchange (TOCOM) and India's National Commodity and Derivatives Exchange also house futures trading.

Physical silver can be bought and sold using its immediate spot price, and physical investors often buy and sell bars and rounds. London Silver Market Fixing Ltd. "fixes" the spot price of silver once a day in a telephone meeting of its three members - representatives of Deutsche Bank AG London, the Bank of Nova Scotia - Scotia Mocatta, and HSBC. The fix is reflected in both cents per troy ounce and pence per troy ounce. The London Silver Fix price is a de facto guideline for pricing silver products and derivatives daily.

Silver value also can be tracked and traded by exchange traded funds, sometimes known as exchange traded commodities. These ETFs are designed so their values track closely with changes in silver's actual bullion price. They trade like equities, as investors can buy and sell shares of trusts that actually own the bullion. Popular silver ETFs include the iShares Silver Trust and PowerShares DB Silver.

Silver is a tangible asset and is recognized as a store of value, but its price also is affected by investors who take into account real or perceived changes in inflation, paper currency values and deficits and interest rates.

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