Currency Market, Commodity Market, and Government Securities

Lesson -> Silver

9.1 - The Bullion Twins

First, I must apologize for the delay in posting this chapter. This is perhaps the longest in-between chapter break I've had since I started writing for Varsity. Due to another important project, I have been occupied.

Let's get to work on Silver. Bullion is a collective term for precious metals like Gold, Silver and Platinum. It is common belief that the market prices of silver and gold move in a similar way. If true, it opens up many trading opportunities like 'pair trading'. We will be discussing pair trading in more detail in another module. Let's now see if Silver and Gold move in tandem. Here are the results of a correlation test I did on Gold and Silver using 30 minute intraday data over the past 3 months.

On an intraday basis, the correlation is0.7This is quite amazing. The correlation at the end-of-day basis is even more impressive, I think. What does this all mean? The correlation indicates that the metals move in a similar way on an intraday basis. We discussed correlation in greater detail in the USDINR chapter.

We might look into trading options such as shorting silver or longing gold if the intraday correlation is higher than 0.7.  As you can be both long and short on similar assets at the same moment, this will be a hedged strategy. This is an overview of the possibility to create a trading strategy. Please don't just jump in and start a trade based on this information.

You have many other things to consider when initiating such trades. We'll be covering pair trading later. Take a look at the intraday gold and silver graphs. I have normalized it to 100 so the graphs are more comparable.

You could look at the graph and make a judgment on how close the metals move. But the numbers show a totally different picture!

As I said, however, I used intraday data to create the correlation and graph. Longer-term data will provide more useful information. Actually, I found the correlation data between gold and silver in a Thomson Reuters survey. Here is what I found.

Correlations are broken down each quarter (clearly a long-term approach). You can see that the average correlation between Gold & Silver is 0.8. This is what traders refer to as the "Bullion Twins".

This tight EOD correlation means that investors and traders consider silver and gold as safe havens during economic crises. This means that global geopolitical tensions can drive not only the price of gold but also silver.

Please also note the relationship of Silver and Oil. It is quite unpredictable and can give an impression on unreliability.

9.2 - The Silver Basics

There are many uses for silver in the electronics, fashion, industrial fabrication and photography industries. There is always a demand to silver. According to a recent survey by ''The Silver Institute', there is a global demand for silver at 1170.5 millions ounces. The demand for silver has increased at an average 2.5% per year over the past. The majority of global demand comes from industrial fabrication and manufacture. This shows that silver's price is directly affected by the growth in manufacturing and industrial economies like China and India.

The supply side shows that global mining production, scarp, and sovereign sales total 1040.6 million troy ounces. This clearly indicates that silver is in a slight shortage. The data show that the supply has not increased over time; in fact, it has only grown by 1.4%.

This table shows you the entire demand-supply situation in silver.

There are many opportunities to trade silver as commodity, given the way that supply and demand plays out. We now return to the main question: who decides silver's rate? A pool of participating banks fixes the silver rate in London the same as it does for gold.

9.3 - The Silver Contracts

You can trade four types of silver contracts on MCX. These contracts differ in the amount of the contract and the margin required. These contracts look like this:

ContractsPrice QuoteLot SizeTick SizeP&L/tickExpiryDelivery Units
Silver1 kilogram30 kgsRs.1/tickRs.30/tick5th day of the expiry month30 kgs
Silver Mini1 kilogram5 kgsRs.1/tickRs.5/tickLast day of the expiry month30 kgs
Silver Micro1 kilogram1 kgRs.1/tickRs.1/tickLast day of the expiry month30 kgs
Silver 10001 kilogram1 kgRs.1/tickRs.1/tickLast day of the expiry month1 kg

The 'Silver 30kg' and 'Silver Mini" are the most traded of all four contracts. We will discuss these two contracts in detail. Let's start with the main Silver contract.

The Silver contract price is 1 kg. The price you see for 1 kilogram of Silver when you look at the Silver price on MCX, or your trading terminal is 1 kilogram. This price does not include import duties or taxes. Take a look at this screenshot (taken from Kite).

Silver December Future's current price is Rs.422,266/-. This is per kg. The contract price will be - because it is for 30kgs (lot size).

= 30 * 42 266


Silver has a margin of around 5%. Here is a snapshot of the margin needed to trade these contracts.

This works out at -



You can calculate the P&L per tick using this formula:

Profit & Loss per tick = (Lot Size divided by Quotation) multiplied by Tick Size

= (30 kgs/1 kg) * Rs.1/


For every tick of Silver, you make Rs.30// or lose Rs.30//.

Here are the current set of available contracts to trade (as of Oct 2016). Please note that all contracts expire on October 5, 2016.

  • December 2016,
  • March 2017,
  • May 2017,
  • July 2017,
  • September 2017,

The December 2016 contract expires and the December 2017 contract is introduced to the market. It is obvious that the closest expiry date would be the most liquid contract. We are currently in Oct 2016 and I would trade Silver if it were up to that date.

Remember that settlements in equity are always made in cash, not in physical form. But, commodities are physical so 'delivery' is mandatory. If you have 10 Silver lots and choose delivery, you will receive delivery on 30kg of Silver. You must express your intention to receive the commodity. You must do this before the commodity expires on 4 days. Given that expiry is on the 5th, it is important to indicate your intent to take delivery on or before the 4th (either the 2nd, 3rd, or 4th).

Zerodha does not permit you to enter the physical delivery of commodities if you trade with us. You will have to close your position by the end of the expiry month. Because of logistics, I prefer to close positions as soon as possible and not get involved in the actual delivery of commodities.

Important note: Delivery is required for Silver (30kgs) contracts, but not for Silver Mini or Silver Micro contracts. This means that the Silver Mini/Micro contracts can be canceled and settled for cash or delivered. You cannot cash-settle the Silver 30kg contract.

Here's something else. look at the picture.

The map above shows a commodity mapped to a specific location. Silver Micro, for instance, is mapped in Ahmedabad. Have you ever wondered what all this means?

As we all know, upon expiry, both the spot price and the futures price of an underlying commodity converge to one price point. In the case of equities the underlying and its derivatives can be traded on the same platform. NSE (and BSE now). Infosys Spot on NSE will, for instance, converge with Infosys Futures. There are many spot markets for commodities. Pepper and rubber are two of the most prominent commodities traded in Kochi. Mumbai, Ahmedabad, and other cities have gold exchanges. This means that the spot price for futures should be merged with the futures. Is it the one in Mumbai? MCX has mapped every commodity with a spot marketplace. When the spot market expires, the futures prices will converge with that spot market's price.

9.4 - Other Silver contracts

It is easy to understand other silver contracts traded on the MCX if you have a good understanding of the Silver contract details. They differ primarily in terms of lot size and consequently the margin requirement.

I will not do the math for you, but I will provide the margin numbers and delivery options. You can choose whether to accept delivery or cash settle.

ContractMargin requiredMargin as a percentageDelivery options
Silver MiniRs.13.158/-6.27%Cash/Physical
Silver MicroRs. 2,618/-5.1%Cash/Physical
Silver 1000Rs. 2,711/-6.2%Only physical

As you can see the margins required for the big silver contract are significantly lower than the ones required for the smaller contracts.

Trading is similar to Gold. The Silver Fundamentals are complex and it may not be possible to track them daily. Many traders I know trade commodities on the basis of technical analysis. This is my personal opinion.

You can trade using quantitative techniques, such as pair trading, in addition to technical analysis. This technique will be discussed in a separate module, as we have already mentioned in the chapter.

To Summarize

  1. Both intraday and end-of-day correlations exist between gold and silver.
  2. If you use the "Pair trading technique", gold and silver make a great pair for trading.
  3. There is not a strong correlation between silver and crude oil.
  4. On MCX, there are four types of silver.
  5. The main Silver contract requires a margin of Rs.75,000/- and a lot size 30 kgs.
  6. The margin requirements for silver are roughly 5-6% of its contract value.
  7. Silver is a good subject for technical analysis.