Understanding the economics of trading in silver futures 

Among the precious metals, silver ranks only next to gold in terms of global trading interest and liquidity. Silver prices have seen a fairly paradoxical situation. Over the last few years, the demand for silver has been in excess of supply. However, the price of silver in the global markets has nearly halved over the last 5 years. The chart below captures the gist of silver price movements over the last 5 years, wherein the trend seems to be clearly negative.
 
Calculating the local price of silver in India
The local price of silver is largely based on the global silver price. While globally the price of silver is expressed in terms of $/oz, in India the price of silver is normally expressed in terms of INR/kilogram. In the chart above, the recent price of silver is $16.27/troy ounce. Here is how we arrive at the corresponding Indian price for silver
 
First we convert the troy ounce into grams. One troy ounce = 31.1035 grams.
 
Hence the price of 1 gram of silver will be (16.27/31.1035) = $0.5231 per gram
 
We can apply the average $ exchange rate of 66/$ to arrive at the rupee price of INR 34.53 per gram
 
Since the price of silver in India is measured in 1 kilogram (1000 gram) basis, the landed rupee price will be Rs.34,530/- per KG.
 
Of course, to this you will add the import duties, cess and other stamp duties and if you also add the cost of carry, you will get the MCX silver futures price of around Rs.37,700/kg. The crux of the matter is that the domestic price of silver is largely influenced by the global price of silver on the LME.
 
What drives the demand and supply of silver
Unlike gold, where demand predominantly comes from jewellery demand and investment demand, the demand and supply economics for silver are slightly different. Nearly 85% of the supply of silver comes from silver mines. The balance 15% comes from the recycling of scrap, which is a major source of silver. Silver has important industrial applications and when these products outlive their utility, the silver can be salvaged from them. On the demand side, there is an equal break-up between jewellery applications and industrial applications. For example, silver finds extensive applications in industries like electrical products, electronic components, photographic applications, solar cells and for soldering purposes.
 
Understanding the Silver Futures contract on the MCX
On the MCX, silver is available for trading in four sub-contracts. The most popular is the Big Silver futures contract, which comes with a minimum lot size of 30 KG. In terms of popularity, Big Silver is followed by Mini Silver which is traded in lot sizes of 5 KG. In addition, there is Silver Micro and Silver 1000; both of which trade in lot sizes of 1 KG. However, these Silver futures contracts are not as popular as the Big Silver and the Mini Silver contracts.
 
Currently, trading in silver futures attracts 4% SPAN margin and 1% extreme loss margin. For a trader in silver this is what is relevant. Of course, there will be delivery margins as the contract gets closer to delivery but that is only case of physical delivery of silver.
 
For the Big Silver futures contract, the lot size value works out to Rs.56,550/- (Rs.37,700 X 30 KG X 5%). Of course, the margin required for the Silver Mini and the Silver Micro contract will be proportionately lower.
 
At any point of time, there will 5 open contracts on silver. Each the monthly contracts 5 months ahead will be launched. For example, in August 2017, the contract for January 2018 will be launched and then it will continue sequentially. The Big Silver futures contract expires on the 5th of the month while the other 3 contracts expire on the last day of the month.
 
Since the silver contract of 30 KG (Big Silver) expires on the 5th of each month, the square off in case of non-delivery positions will have to be ideally completed before the 1st of the month.
 
What influences silver prices globally?
As we saw earlier, silver prices in India are influenced by global silver prices. It is therefore instructive to understand what impacts prices of silver globally and in India

Silver supply is concentrated in certain countries like Australia, Bolivia, Mexico and Kazakhstan. Hence supply disruptions in any of these key mines can have the impact of pushing up prices of silver as silver tends to be very sensitive to supply shocks.

On the demand side, economic growth, higher production and new manufacturing facilities can push up prices due to a spurt in demand. This is more due to silver demand already being in excess of supply.

Lastly, speculative positions on silver also impact the spot price of silver. When traders are excess long in the market, it tends to create a cap on the price while too much of net shorts in the market tend to create a floor for the price of silver.

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