How is the Silver Spot Price Set?

Silver Spot Price – (n) the theoretical price of 1 troy ounce of silver available for immediate delivery before being minted into a bullion bar, round, or coin.

When you visit an online silver bullion dealer website like JMBullion, chances are you will see the live silver spot price quoted somewhere on the website.

You may ask yourself, “How come the silver bullion products sold on the website are not priced at the silver spot price?”. “What is the silver spot price, if not the price of silver itself?”

If it were only that simple.

When you look granularly at how silver spot prices are made you will find complexity. The main money powers influencing the silver spot price are not for the most part exchanging the physical precious metal but instead using proxies and derivative contracts representing the underlying commodity to determine what the real world physical silver price ultimately is.

You wouldn’t be strange if you thought this situation didn’t make common sense.

Why would theoretical contracts representing physical commodities dictate the real world price of such an important precious material?

Is the way the silver spot price is set not a strange case of the tail wagging the dog?

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Commodities can be goods such as silver, gold, crude oil, platinum, wheat, corn, coffee, soybeans, cotton, and other items. These commodities all have futures contracts listed on various exchanges throughout the world. The futures price for a commodity is a mixture of contracts priced for future delivery of that particular commodity.

A spot price is the fluctuating market price for an asset bought or sold on commodity exchanges contracted for immediate payment and delivery.

The spot price of silver is determined by the forward month’s futures contract with the most volume. At times this contract can be the current month or it might be two or more months out in time.

Futures contracts exist to provide commodity producers, end users, and price speculators a way to potentially and respectively manage price risk, buy and take future delivery of goods, or bet on commodity’s price rise or fall.

A futures contract can extend far out in time. For instance, one could buy or sell a contract of oil that expires in several years.

The silver spot price is traded close to 24 hours a day during week days halting on weekends. The spot price for silver is mainly derived from exchanges centered in London, Zurich, New York, Chicago, China, and Hong Kong.

The spot price fluctuations of silver today are mostly determined by the COMEX. The COMEX division of the New York Mercantile Exchange is still the most significant future contract trading market for silver and consequently it has the most influence on silver’s fluctuating worldwide fiat currency spot price values.

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Futures contracts for silver on the COMEX represent the futures price of 5,000 ounces of silver for a future potential delivery date, yet most futures contracts are not settled in the physical real world commodity, merely in cash value. Often times today, many 100s of ounces of digital silver futures contracts are traded on the COMEX for every 1 physical ounce of silver bullion that is ultimately delivered upon in the real world. Note the Deliveries / Open Interest of 0.43% above.

Trillions of US dollars in COMEX silver contracts are traded now annually yet the world’s annual silver supply is valued at less that $20 billion USD.

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Since silver bullion is a tangible asset, and is recognized as a store of value, its fluctuating spot price is typically affected by factors like speculator sentiment, potential price inflation/deflation threats (real or perceived), changing values of digital and paper fiat currencies, fluctuations in government deficits, market/central bank mandated interest rates, geopolitics, and news events.

Did you know?

Ever since silver’s spot price peaked close to $50 oz USD in late April 2011, commercial bank JP Morgan Chase actively acquired over 90 million ounces of physical silver bullion for its COMEX depository silver stocks.

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JP Morgan now accounts for close to 1/2 of all physical silver stocks (eligible and registered) today. There are many industry experts who believe JP Morgan has a large growing persuasion on the COMEX silver exchange ultimately influencing silver’ spot price around the world.

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Why the commercial bank is amassing a silver hoard comparable to one the size of the Hunt Brothers from the last 1980 bull market, remains to be fully understood by market participants.

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Source

Silver Spot Price in Review

The silver spot price today remains a composite of the world’s futures markets (mostly the COMEX) buying and selling futures contracts representing the underlying real world precious metal.

The physical market for silver bullion items (like the ones JMBullion sells), tracks the silver spot price but generally silver bullion product prices hover over the silver spot price. In other words, if silver’s spot price is $20 oz, you’ll find most bullion products priced above $20 oz.

The flow from silver’s spot price to silver bullion delivered discreetly to one’s door goes like so:

  • Futures traders make leveraged derivative bets on worldwide futures exchanges determining fluctuations in the silver spot price.
  • Miners dig silver ore from the ground (mostly as a byproduct as there are not many silver only producing mines in the world) and then sell mixed ore and doré silver bars to fine bullion refiners typically pricing their goods just below the world’s silver spot price.
  • Refiners then melt and purify the ore into fine bullion, which is then sold to mints or bullion dealers at just above silver’s spot price.
  • Private and gov’t mints also strike bullion coins or pour bullion bars, selling them to silver dealers at prices typically just above the silver spot price.

Retail bullion dealers (like JMBullion) offer silver bullion coin, round, and bar products competitively priced just over the fluctuating silver spot price.

We hope this helps your better understanding of how the silver spot price is set and determined.

It is certainly not a simple subject nor one most market participants fully understand.

All Market Updates are provided as a third party analysis and do not necessarily reflect the explicit views of JM Bullion Inc. and should not be construed as financial advice.