Gold and silver are attracting a lot of attention recently, as more people decide that paper money is becoming less valuable. That means that precious metals, physical things you can own, are more in demand and there is upward pressure on the price.
Many people are learning how to trade silver using contracts for difference, as this is a convenient way to profit from an increase in price without the headaches of storing the physical metal. Silver is particularly interesting for the trader, as it differs from gold in a couple of respects. Nearly as much gold as has ever been found is still in existence in the world in the form of jewellery and other items; whereas there is very little silver left of what has been mined, as it gets used up in many different industrial processes (industrial, photography..etc). And the industrial uses for silver, given its unique characteristics, are immense. There are literally new uses for silver found every day. In contrast with gold, silver is no longer held as part of central bank reserves to any significant extent and more than 75% of freshly mined silver is used in industrial applications which reduces the overall supply.
The silver price plummeted with the end of chemical based photography and has only just begun to recover (and it has at least some ‘psychological’ attraction that platinum doesn’t). All attempts to ‘monetarise’ platinum (most notably by Tsarist Russia) have failed. Technological developments will reduce platinum demand whilst at the same time nanotechnology will boost silver demand (though of course not necessarily forever!).
When you use contracts for difference to trade silver, you will find that it is extremely efficient. The margin requirement, the amount you have to put up to enter a trade, can be as little as 0.5%, giving you the leverage of 200 to 1 on your money. In the futures market, another way to trade on commodities, you may only get a leverage of 25 to 1, which makes the CFD far more effective.
Depending on your CFD broker, you may be able to trade on the spot price of silver, that is the current price, or you can also take out a contract on the price on a future date. Using CFDs it is as easy to profit from a fall in value as from a rise, so you are also able to make money during periods of price consolidation. Your chief cost of trading is in the spread, which makes it easy to understand.
Say for example that you wanted to take out a contract for difference for a long position in silver anticipating that the price will increase. You may be quoted 20.44 — 20.49. The lot size may be 500 ounces, and one advantage of using CFDs is that you’re not restricted to the lot sizes offered on standard futures contracts. One long contract on 500 ounces would be worth $10,245, so the margin requirement could be as little as $50, depending on your broker.
If the price now goes up to 20.72 — 20.77 and you close the position, your points gain from 20.49 to 20.72 is 23. The value of the contract has gone up to $10,360, an increase of $115 for a modest gain in price on a margin of $50.
Of course, leverage can work against you, and if the price had fallen you could be facing a margin call from your broker to make up your losses. Therefore it’s important that you take time to educate yourself about CFDs, and make sure that you cut your losses whenever it becomes apparent that you don’t have a winning position.