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Trading Silver

Silver is unique among commodities. Like gold and a few others, private investors can feasibly take actual delivery. But unlike gold, the price is within reach. Physical storage is not out of the question and security can be as simple as bank's safe deposit box.

The possibility of taking delivery on a commodity expands trading strategies since it allows for additional hedging, using a combination of spot and futures contract trades. It also allows for pure spot trading with local merchants. 'Spot trading' means buying and selling the actual commodity, as distinguished from trading futures contracts in which actual delivery, for most traders, is rare.

Another advantage of silver is its relatively low per ounce price. Silver has traded in the range of $5-$15 per ounce for decades. Like lower-priced stocks, those prices make silver more accessible to the average investor in quantities large enough to make substantial profits.

That price range doesn't sound good to someone used to trading stocks and seeing them rise to ever greater heights over the years. But factoring in inflation, those stock prices don't always look so good. Silver, like gold, is one way to measure real prices.

Traded on COMEX (The Commodity Exchange of New York) and elsewhere, the standard contract size for silver futures is 5,000 troy ounces. A 'troy' ounce is 1.1 times the common avoirdupois ounce used in cooking and packaging. COMEX is a division of the New York Mercantile Exchange.

The tick (minimum price fluctuation) is $0.005 per troy ounce. With a minimum of 5,000 troy ounces, that makes a tick worth $25. That's a substantial change to those used to stock prices which move around 10 to 25 cents per share, but multiplying by 100 shares brings it in the same range. In any case, it's a normal amount in commodities trading.

A standard price quote may appear as:

Contract Date Last Change Open High
Jun '06 (SIM06) 1014.8 -3.7 1013.8 1014.8

Low Date/Time
1012.8 12:29

The contract date specifies the expiration month and year of the contract. The specific date is set by the exchange. The characters in parentheses are a standard abbreviation for a futures contract. SI is silver, M is the short form used for June and 06 specifies the year, 2006. The others represent familiar price quote columns.

The prices are specified in cents per troy ounce, hence 1014.8 would be equivalent to $10.148 per ounce. One contract at $10 per ounce, for 5,000 ounces is therefore an investment of $50,000. For the average investor, that's a substantial chunk and one of the reasons futures and options - which allow investing around 5% of that - are so popular.

One caveat: silver prices - like those of any commodity - are volatile. In May 2006, the silver price peaked at over $15 per ounce. It promptly retraced to around $10 per ounce. But, as with any other form of trading, what counts is not the absolute price or even solely the trend. Profits are measured by the difference between buying and selling prices and that means timing is essential.