Silver mcx analysis


 – The Bullion Twins

Let us focus our attention on Silver and delve into the intricacies of its price movements. Precious metals such as Gold, Platinum and Silver are often grouped together as ‘Bullion’. There is a popular belief that gold and silver usually move in lockstep. This notion gives rise to a variety of opportunities for traders such as ‘pair trading‘. Nevertheless, we will first verify if these two assets actually do move in harmony. I ran a correlation test on intraday 30-minute data for the last 3 months (over 1,000 data points) with the following outcome 

The correlation between the two metals on an intraday basis is 0.7, a number that can’t be ignored. I’m sure the correlation at the end of day will be even more remarkable. What does this imply? It shows that the two metals move in tandem when trading intraday. If you recall our earlier conversation on correlation in the USD INR chapter, this all makes sense now.

If the intraday correlation reaches 0.7, then going long on gold and short on silver, or vice versa, could be explored for a hedged strategy. However, do not act immediately upon this information; more research is needed before making a trade.

When you initiate these particular trades, there are a few other matters to address. We’ll discuss pair trading more in depth later on. In the meantime, have a glance at the intraday graphs of both gold and silver – I have normalized their initial values to 100 to make it easier for them to be compared.

Examining the graph, it’s likely that any connection between the two metals would be overlooked. However, when looking at the numbers, a different story is told!

I previously used intraday data to construct the correlation and graph. Although it offers an adequate view, turning to longer-term data will give a more insightful picture. I acquired the correlation information between gold and silver from a recent Thomson Reuters survey. It suggests that…

Quarterly breakdowns of the correlations between Gold and Silver show they average at around 0.8, which is why traders often refer to them as the ‘Bullion Twins’. This indicates a longer-term approach is required to accurately assess their relationship.

The close correlation between gold and silver prices indicate that investors consider both metals to be safe options during times of financial insecurity. This further highlights the impact of international political tensions on the cost of gold and silver.

Please note the correlation between Silver and Oil; it is quite unpredictable, giving an impression of unreliability.


 – The Silver Basics

Silver is sought after for its industrial, photographic, fashion, electrical and electronics applications. There is a continuous demand for the metal, as can be seen from ‘The Silver Institute’s survey in the United States which states that 1170.5 million ounces have been globally requested. Its price has grown steadily over time at approximately 2.5% annually due to the large amounts of inquiries for industrial fabrication and manufacturing processes. It is not surprising that major manufacturing countries like China and India – to some extent – are significant factors of affecting the silver cost.

On the supply side, it’s clear that global mining production, scrap, and sovereign sales are causing a slight deficit in silver as a commodity. Data suggests that while these supplies haven’t increased much over the years, there has been a mere 1.4% growth. Altogether this stands at 1040.6 million ounces.

This table provides a comprehensive overview of the demand and supply of silver.

Taking the supply and demand into account, commerce in silver presents numerous opportunities. That leads us to the most critical inquiry – who establishes silver prices? The same way that gold is determined, the price of silver is set by a collection of participating banks located in London.


– The Silver contracts

The four silver contracts offered by MCX vary in terms of contract value and margin requirement. These include 1 kg, 5 kg, 10 kg and 30 kg.

MCX is actively trading two out of its four contracts – the ‘Silver’ 30 kg and ‘Silver Mini’. We shall discuss both of these in more detail. Let’s begin with the primary Silver contract.

The price of Silver on MCX or your trading terminal is 1 kilogram, inclusive of import duties, taxes, and other applicable fees.

– The other Silver contracts

If you are familiar with Silver agreement details as described above, it is not difficult to comprehend the additional silver contracts that MCX carries. These agreements largely differ in terms of lot size and consequently their margin demands.

I won’t go into the math involved, but instead will provide you with the margin numbers and delivery option. This latter should help you decide if you would like to receive delivery of the contract or just settle in cash.

The margins for the silver contract are much higher, as can be seen, but those required by this contract are much lower.

When it comes to trading, monitoring the Silver Fundamentals on a daily basis is not necessary. Technical analysis is a far more suitable way for active traders; this approach has worked for many I know.

Apart from technical analysis, one can even choose to trade using quantitative strategies like ‘Pair Trading’. As we have mentioned previously in this chapter, we will discuss this technique further in its own module.


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