Selling (Going Short) Silver Futures to Profit from a Fall in Silver Prices

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Silver price forecast 2020 and beyond: will this precious commodity fit into your portfolio?

Precious metals, including silver, gold and platinum, have been go-to assets for centuries. In different shapes and forms, they are continuously attracting investors from all around the world looking to diversify their investments of regular stocks and bonds.

Do you also want to add some silver shine to your portfolio, but not sure how this commodity is set to perform in the next few years? Wondering how high will silver go by 2020 and beyond? Then this article is for you.

Here, we cover the basics of silver investing, review its recent performance and take a look at what the long-term silver price forecast looks like.

The basics: what you need to know about the silver price trends

Price of silver tends to move similarly to that of gold, especially when economic performance turns for the worse. During times of political turbulence and economic uncertainty, the prices of base metals, such as zinc and copper, drop due to the contracting industrial demand. On the other hand, the prices of silver and gold skyrocket, as investors usually cling to them to hedge the risks and strengthen their investment portfolios.

Both silver and gold prices often fluctuate in tandem: it is rather rare to see gold falling and silver rising, or vice versa, at the same time. Commonly, the long-term trends for both precious metals tend to mirror each other, although silver value experiences volatility more frequently, particularly on the upside.

Generally, gold gets more attention in the mainstream financial press and is often recommended by many investment advisors. However, when you read about gold picking up steam and growing in value, there’s a very good chance that silver is making similar moves. And if history is any example, those moves in silver price are often larger percentage-wise than those in gold.

Silver price analysis from 1970 to 2020: through hardship to the stars and back

To better navigate in the silver price trend, it is important to know how this commodity has performed in the past. Here is what its historical price chart from 1970 to 2020 looks like:

Throughout its history as a traded commodity, silver has seen many ups and downs, reflecting a variety of economic and political events. On January 18, 1980, this precious metal was at its premium, hitting $49.45 per ounce, the highest silver price to date. It then quickly reversed the bullish trend and lost most of its value, falling to $3.55 an ounce in February 1991.

Things became better after the financial crisis of 2008, when many have chosen to invest in both gold and silver, making these commodities one of the most popular markets of the past decade. This, in turn, helped silver to surge one more time, hitting the mark of $48.70 in April 2020. Shortly, its price entered another downtrend, experiencing unprecedented volatility and continuous change in investors’ sentiment.

During the last year, the grey metal had lost much of its shine. While 2020 was expected to be a great year for precious metals, instead, it ended up being a down year for many assets across the board, from bonds and stocks to silver and gold. The silver market faced a challenging environment, weighing on its price dynamics. The highest silver had gone was just under $17.60 an ounce.

Silver was hit hard, dropping 9% over the course of the year. On November 14, 2020, its price fell below the mark of $14 per ounce for the first time in almost three years.

Its performance during this summer has investors all excited about the future of this white metal, reflected in an 80% increase in bullish positions among futures investors. Is this rise in price only a foreshadowing of what is yet to come? Well, many silver-focused investors believe that a bull market for silver is possible, and that its prices could rise even higher by the end of this year.

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According to the chart, silver has gained upside momentum.

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If history is any example, does it mean we are about to see some major value gains in silver in the future?

What factors to watch when predicting future silver prices 2020 and further

Before diving into the silver price forecast 2020, it is important to understand what actually drives the price of this commodity.

Emerging economic and geopolitical turbulence, including the ongoing U.S.-China trade war, the Brexit saga, rising tensions in the Middle East and fears of a slowing global economy, has triggered many investors to take a step towards a rather reliable asset – commodities, driving silver prices up.

With the decreasing amount of silver being mined annually, the metal is already in short supply above ground. Besides, increased industrial demand for silver is rapidly depleting the existing reserves. Adding the rising demand from international investors, the conditions are rather perfect to see gains in the silver price in the coming months and years. Therefore, even if a slowing global economy was to decrease industrial demand for silver, the high interest from investors would likely make up for that.

In regards to supply, in the last year, the top three silver producers were Mexico, China and Peru. According to the latest World Silver Survey, published by the Silver Institute and Thomson Reuters’ GFMS team, the silver market saw a 3% decrease in supply in 2020 amid reduced mined and scrap output, leading to a physical market deficit of 29.2 million ounces.

When trying to understand silver outlook 2020, it may also be helpful to look at gold price drivers. As we have mentioned before, even though silver is the more volatile of the two precious metals, it often trades in relative tandem with gold.

The strength of the U.S. dollar and developments in interest rate policies from the US Federal Reserve also affect the prices of these precious metals. For example, at the end of 2020, silver lost almost 14% amid a strong U.S. dollar and a negative impact from the Fed raising interest rates four times throughout the year.

Presently, as the U.S. currency continues to fluctuate in value, silver has made some steady inclines, gaining and maintaining a trading price that is over $18 per ounce.

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Therefore, if you want to make accurate silver price predictions 2020 and beyond, you have to stay up to date by browsing the latest news regularly. It is also important to filter out the commentary you may hear about silver, from overly confident and optimistic silver bulls to sceptical bears who believe the metal will eventually cost less than lead. Make sure to focus on the valid data and base your decisions on real facts.

Below, we gathered some analysts’ predictions to answer the question: how much will silver be worth in 2020?

Silver price forecast 2020 and beyond: is it set to skyrocket or fall?

When thinking about how high will silver go by 2020, the experts’ opinions have split in two.

In his interviews with Palisade Research in 2020 and Kitco in 2020, CEO of First Majestic Silver, Keith Neumeyer, said the white metal has a potential to reach the $130 level. In the past, he gave even more bold predictions, suggesting silver could reach $1,000.

Although many analysts and investors do believe that the price of silver is set to rally, none of them expects a three-digit increase. For example, on September 11, 2020, Bank Of Montreal revised its forecast for both gold and silver through 2022. Bank’s precious metals analyst, Colin Hamilton, said the firm is bullish on precious metals as central banks are “falling over each other to ease,” monetary policy. He added: “In our view, this should provide support for gold and silver to trade for a sustained period above our long-run equilibrium expectations.

In its updated forecast, the bank suggests silver prices “breaching $20 an ounce to average the fourth quarter around $19.90 an ounce”. For 2020, their silver price expectations are $18.60 an ounce, which is almost 21% higher from their previous forecast.

RBC bank also increased its silver price forecast for the second semester of 2020 to $17.33 per ounce, compared to the previous $15.75. Regarding its longer-term predictions, silver is expected to trade at $17.50 per ounce in 2020.

Johann Wiebe, a lead analyst at Thomson Reuters’ GFMS division, said he expects silver prices to set around $16.75 in 2020 and $17.50 in 2020 due to rising political and economic uncertainty, which supports the precious metals market.

Analysts at Degussa, a European precious metals firm, have also increased their price target for silver, calling for a rally to $23 an ounce by the end of 2020.

On the other hand, analysts at Wallet Investor have taken a bearish stance. They refer to the commodity as a potentially “bad, high-risk 1-year investment option”. Considering their prognosis, your current investment in silver may be devalued in the near future.

This is what their silver price predictions 2020 looks like:

Based on the opinion of another popular forecasting agency, Longforecast.com, silver is expected to trade at $22.50 per ounce in January 2020, showing some volatility throughout the next year but still staying in the price range of $20.60 – $22.69 per ounce.

Here are their long-term silver price predictions for the next few years:

Analysts at Gov Capital have a much more positive outlook, saying that in by September 2024, the silver price will hit $86.260.

However, their one-year forecast looks less promising:

The bottom line

All in all, is silver a safe investment? Just like with any other asset, investing in silver gives no guarantee of financial success. According to the latest silver price forecast 2020 and beyond, you may want to add silver to your diversified investment portfolio to serve you well in times of economic uncertainty, rather than investing all of your money in this precious metal.

If you decide that silver is the right investment for you and it has good potential for future price appreciation, the next step to decide on how to invest in this commodity. There are, in fact, a plethora of options. One of them is to invest in silver through contracts for difference, or simply CFDs.

Will Silver Go Up? This Will Push The Silver Price Much Higher

Precious metals investors need to understand the coming silver price surge will not occur due to the typical supply and demand forces. While Mainstream analysts continue to generate silver price forecasts based on supply and demand factors, they fail to include one of the most important key forces. Unfortunately, the top paid Wall Street analysts haven’t figured it out that supply and demand forces don’t impact the silver price all that much.

For example, I continue to read articles by analysts who suggest that industrial demand will impact the silver price in the future. They believe that rising industrial silver demand should push prices higher while lower demand would do the opposite. However, according to my research, I don’t see any real correlation. So, why should industrial demand impact the silver price in the future when it hasn’t in the past?

If we look at the following chart, there doesn’t seem to be a correlation between global industrial silver demand and the silver price:

Here we can see that industrial silver demand only increased 17 million oz (Moz) in 2020 compared to 2008. However, the price more than doubled from $14.99 to $35.12. On the other hand, as the silver price fell in half in 2020 versus 2020, industrial silver demand only declined by 30 Moz (600 Moz down to 570 Moz). Thus, rising or falling industrial silver demand isn’t a factor that determines the silver market price.

Also, many analysts have suggested that a falling silver price would generate more industrial consumption. Unfortunately, as the silver price peaked and declined in 2020, so has industrial demand. Now, some readers may believe that the decline in industrial silver consumption is due to less silver being used in photographic applications. While this is partially true, if we remove photographic silver usage from industrial demand, we can plainly see that industrial consumption of 529 Moz in 2007 was higher than the 517 Moz in 2020:

Regardless, forecasts for industrial silver consumption have been consistently wrong. In an article I wrote back in 2020, I stated the following on industrial silver demand:

I have always stated that industrial silver demand, especially solar power demand, will not be much of determining factor in setting the price in the future. Wall Street analysts continue to regurgitate that industrial silver demand will grow for the next 5-10 years. Hogwash.

When the peak of global oil production takes place within the next several years, this will impact Global GDP growth. Matter-a-fact, world economic activity will contract along with the decline in global oil production. Which means, demand for silver in industrial applications will decline as well.

Here is a chart showing the forecasted growth of industrial silver consumption from a report by GFMS done in March 2020, for the Silver Institute:

GFMS Analysts projected that industrial silver demand would rise to 650 Moz by 2020. However, If we look at the first chart above, global industrial silver fabrication declined over the past five years falling to a low of 562 Moz in 2020. Even though silver consumption in Solar PV manufacturing may increase for a few years, I believe overall industrial silver consumption will continue to decrease, especially when the markets crack and U.S. and global oil production decline.

Global Silver Scrap Supply Running Low Even At Higher Prices

Global silver scrap supply has hit the lowest level in a decade. According to the data in the 2020 World Silver Survey, global silver scrap supply peaked in 2020 at 260 Moz and fell to a low of 140 Moz last year. That’s a 46% decline in just five short years:

The last time global silver scrap supply was this low was in 1990 when the market only recycled 135 Moz of silver. And get this… the price of silver was $4.82 in 1990. So, with a price nearly four times higher in 2020, silver scrap supply is about the same as it was in 1990. Which suggests, the market has already recycled a lot of its easy and accessible silver scrap supply.

Understanding the changing dynamics of industrial silver consumption and silver scrap supply is essential for determining long-term valuations of the metal rather than short-term yearly price signals. Which means, industrial silver consumption and scrap supply haven’t really impacted the silver price as much as the price of oil.

As we can see in the chart above, the price of silver paralleled the spikes in the oil price. Thus, the silver price was based more on the volatile oil price rather than supply and demand fundamentals in the silver market. However, it is important to know how the individual silver supply and demand sector fundamentals are changing over an extended period.

For example, Net Government silver sales supplemented the market for many years:

While Central Banks sold a lot of silver into the market, the extra supply didn’t impact the silver price as much as the surging oil price. Although, the important factor to understand about the liquidation of Central Bank silver stocks is that most of this supply has already been sold into the market. According to the data from the 2020 World Silver Survey, Central Banks didn’t sell any silver into the market over the past three years.

Here are three important takeaways from the chart above:

  1. Central Banks supplemented the market with much-needed silver, but this supply is now mostly depleted
  2. Central Bank silver sales should not be a fundamental used to determine a short-term silver price, rather to show how the lack of future government supply will impact the market.
  3. Central Banks held a great deal of old official silver coins as stocks for decades. The United States had the most, but this was liquidated decades ago. The remaining official stocks were held by a few Central Banks, such as China, Russia, and India. These three governments were the primary source of Central Bank silver sales for the past two decades. However, that supply has been severely depleted and will no longer supplement the market in the future as it did in the past.

Again, I look at Central Bank silver sales as a fundamental that provides information about the long-term dynamics of the overall market, not to be used for short-term price movements.

Putting Silver Market Fundamentals Into Perspective

To understand what will happen to the future silver market and price, we need to analyze the role that the fundamentals play correctly. While most Mainstream analysts focus on supply and demand factors to determine short-term silver prices, I study them to figure out how the entire market is changing over the long-term.

As I have stated in many articles in the past, industrial silver consumption is not a fundamental that determines the silver price; rather it reveals to me how the global economy is disintegrating. Furthermore, Central Bank silver sales and scrap supply should not be used to forecast short-term silver price movements. On the other hand, these two fundamentals provide data that suggests silver supply from reliable sources have been seriously depleted.

Unfortunately, some of my readers are frustrated that these fundamentals haven’t pushed silver much higher prices already. So, when I continue to write articles showing how these silver market fundamentals are changing, they criticize by saying,” those fundamentals don’t mean anything or impact the price.” While that may be true currently, it won’t be the case in the future.

Frustrated precious metals investors need to realize the following three important key factors:

  1. The Silver Market fundamentals are pointing to a perfect storm in the future as reliable past supplies can’t be counted on in the future.
  2. Most of the physical silver investment is held in tight hands.
  3. The disintegrating Energy Industry is the most critical factor and the UNKNOWN fundamental that will impact the value of silver in the future.

Of the three key factors above, the third one (the UNKNOWN Disintegrating Energy Industry) will impact the future value of the silver the most. However, most of the individuals in the precious metals community are still unaware of how energy will affect the silver price and market in the future. Instead, many in the Alternative Media continue to focus the silver market in regards to the economic and financial industry.

I will be putting out some articles shortly showing just how bad the situation in the U.S. and Global Oil industry has become. When the U.S. and Global Oil Industry really starts to disintegrate, it will destroy the value of most Stocks, Bonds and Real Estate. Thus, the precious metals, especially silver…. will experience a price rise never witnessed before in history.

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Independent researcher Steve St. Angelo started to invest in precious metals in 2002. In 2008, he began researching areas of the gold and silver market that the majority of the precious metal analyst community have left unexplored. These areas include how energy and the falling EROI – Energy Returned On Invested – stand to impact the mining industry, precious metals, paper assets, and the overall economy.

Trading Gold and Silver Futures Contracts

Gold and silver futures contracts can offer a hedge against inflation, a speculative play, an alternative investment class or a commercial hedge for investors seeking opportunities outside of traditional equity and fixed income securities.

In this article, we’ll cover the basics of gold and silver futures contracts and how they are traded, but be forewarned: trading in this market involves substantial risk, which could be a larger factor than their upside return profiles.

Key Takeaways

  • Investors looking to add gold and silver to their portfolio may want to consider futures contracts.
  • With futures, you don’t need to actually hold physical metal and you can leverage your purchasing power.
  • Holding futures has no management fees that might be associated with ETFs or mutual funds, and taxes are split between short-term and long-term capital gains.
  • You will, however, need to roll your futures positions over as they expire, otherwise you can expect delivery of physical gold.

What Are Precious Metals Futures Contracts?

A precious metals futures contract is a legally binding agreement for delivery of gold or silver at an agreed-upon price in the future. A futures exchange standardizes the contracts as to the quantity, quality, time, and place of delivery. Only the price is variable.

Hedgers use these contracts as a way to manage price risk on an expected purchase or sale of the physical metal. Futures also provide speculators with an opportunity to participate in the markets without any physical backing.

Two different positions can be taken: a long (buy) position is an obligation to accept delivery of the physical metal, while a short (sell) position is the obligation to make delivery. The great majority of futures contracts are offset before the delivery date. For example, this occurs when an investor with a long position initiates a short position in the same contract, effectively eliminating the original long position.

Advantages of Futures Contracts

Trading futures contracts offers more financial leverage, flexibility, and financial integrity than trading the commodities themselves because they trade at centralized exchanges.

Financial leverage is the ability to trade and manage a high market value product with a fraction of the total value. Trading futures contracts is done with a performance margin, which requires considerably less capital than the physical market. The leverage provides speculators with a higher risk/higher return investment profile.

For example, one futures contract for gold controls 100 troy ounces, or one brick of gold. The dollar value of this contract is 100 times the market price for one ounce of gold. If the market is trading at $600 per ounce, the value of the contract is $60,000 ($600 x 100 ounces). Based on exchange margin rules, the margin required to control one contract is only $4,050. So for $4,050, one can control $60,000 worth of gold. As an investor, this gives you the ability to leverage $1 to control roughly $15.

In the futures markets, it is just as easy to initiate a short position as a long position, giving participants a great amount of flexibility. This flexibility provides hedgers with an ability to protect their physical positions and for speculators to take positions based on market expectations.

Gold and silver futures exchanges offer no counterparty risks to participants; this is ensured by the exchanges’ clearing services. The exchange acts as a buyer to every seller and vice versa, decreasing the risk should either party default on its responsibilities.

Futures Contract Specifications

There are a few different gold contracts traded on U.S. exchanges: one at COMEX and two at eCBOT. There is a 100-troy-ounce contract that is traded at both exchanges, and a mini contract (33.2 troy ounces) traded only at eCBOT.

Silver also has two contracts trading at eCBOT and one at COMEX. The “big” contract is for 5,000 ounces, which is traded at both exchanges, while eCBOT has a mini for 1,000 ounces.

Gold Futures

Gold is traded in dollars and cents per ounce. For example, when gold is trading at $600 per ounce, the contract has a value of $60,000 ($600 x 100 ounces). A trader that is long at $600 and sells at $610 will make $1,000 ($610 – $600 = $10 profit; $10 x 100 ounces = $1,000). Conversely, a trader who is long at $600 and sells at $590 will lose $1,000.

The minimum price movement, or tick size, is 10 cents. The market may have a wide range, but it must move in increments of at least 10 cents.

Both eCBOT and COMEX specify delivery to New York area vaults. These vaults are subject to change by the exchange. The most active months traded (according to volume and open interest) are February, April, June, August, October, and December.

To maintain an orderly market, these exchanges will set position limits. A position limit is the maximum number of contracts a single participant can hold. There are different position limits for hedgers and speculators.

Silver Futures

Silver is traded in dollars and cents per ounce like gold. For example, if silver is trading at $10 per ounce, the “big” contract has a value of $50,000 (5,000 ounces x $10 per ounce), while the mini would be $10,000 (1,000 ounces x $10 per ounce).

The tick size is $0.001 per ounce, which equates to $5 per big contract and $1 for the mini contract. The market may not trade in a smaller increment, but it can trade larger multiples, like pennies.

Like gold, the delivery requirements for both exchanges specify vaults in the New York area. The most active months for delivery (according to volume and open interests) are March, May, July, September, and December. Silver, too, has position limits set by the exchanges.

Hedgers and Speculators in the Futures Market

The primary function of any futures market is to provide a centralized marketplace for those who have an interest in buying or selling physical commodities at some time in the future. The metal futures market helps hedgers reduce the risk associated with adverse price movements in the cash market. Examples of hedgers include bank vaults, mines, manufacturers, and jewelers.

Hedgers take a position in the market that is the opposite of their physical position. Due to the price correlation between futures and the spot market, a gain in one market can offset losses in the other. For example, a jeweler who is fearful that they will pay higher prices for gold or silver would then buy a contract to lock in a guaranteed price. If the market price for gold or silver goes up, they will have to pay higher prices for gold/silver.

However, because the jeweler took a long position in the futures markets, they could have made money on the futures contract, which would offset the increase in the cost of purchasing the gold/silver. If the cash price for gold or silver and the futures prices each went down, the hedger would lose on her futures positions but would pay less when buying her gold or silver in the cash market.

Unlike hedgers, speculators have no interest in taking delivery, but instead, try to profit by assuming market risk. Speculators include individual investors, hedge funds, or commodity trading advisors (CTAs).

Speculators come in all shapes and sizes and can be in the market for different periods of time. Those who are in and out of the market frequently in a session are called scalpers. A day trader holds a position for longer than a scalper does, but usually not overnight. A position trader holds for multiple sessions. All speculators need to be aware that if a market moves in the opposite direction, the position can result in losses.

The Bottom Line

Whether you are a hedger or a speculator, it’s crucial to remember that trading involves substantial risk and is not suitable for everyone. Although there can be significant profits for those who get involved in trading futures on gold and silver, keep in mind that futures trading is best left to traders who have the expertise needed to succeed in these markets.

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