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How is the Price of Silver Determined?

In theory, silver’s price rises and falls due to the forces of supply and demand. When demand for silver is greater than supply, the price of silver rises; on the other hand, when the supply of silver is greater than demand, the price of silver falls. Silver’s demand comes from traders looking to earn short-term profits, long-term investors, and physical buyers who use it to manufacture jewelry and in a wide variety of industrial applications. Silver’s supply comes from mining companies that extract it out of the earth, and also recycled silver, and also investors and traders that sell their silver holdings.

In actuality, most silver “price discovery” occurs in two main trading venues: the London Silver Market (where synthetic unallocated silver contracts are traded), and the COMEX futures exchange (where silver futures contracts and other silver derivatives are traded).

Although there are other silver trading venues around the world, the London Silver Market and the COMEX exchange dwarf all of the others in terms of sheer trading volume. The international price for silver derived in London and on COMEX is quoted in US dollars, with local silver markets around the world use the international price of silver to set their prices.

Note that unfortunately, the price discovery process for gold and silver has been corrupted and distorted by the explosion of “paper” or synthetic gold and silver in the form of futures, options, swaps, and exchange traded funds that are not fully backed by actual physical gold and silver. At the moment, the amount of synthetic gold and silver in existence far exceeds the amount of physical gold and silver in existence. Paper gold and silver supply has flooded the market, which has had the effect of suppressing precious metals prices. In a genuine and fair precious metals market, physical precious metals prices would be much higher than they currently are.

Spot Trading vs. Futures Trading

The majority of silver trading occurs via the spot market and the futures market. The spot market is an unallocated wholesale market where unallocated silver (silver credit) is bought or sold with the intention of immediate delivery and short-dated settlement. Silver is typically traded in the spot market in units of 100,000 to 200,000 troy ounces. The spot price of silver is quoted during standard trading hours by market makers who create a two-way market in silver. Most silver spot trading occurs on the over-the-counter (OTC) London Silver Market in which participants trade over the phone, through brokers, or electronic platforms.

The silver futures market, on the other hand, refers to trading of silver futures contracts that are a derivative of the price of silver. Silver futures are often considered to be a form of “paper silver.” Traders and investors use silver futures to gain exposure to silver’s price movements without having to actually ship or store physical silver. The bulk of global silver futures trading occurs on the COMEX exchange, where the typical futures contract represents 5,000 troy ounces of silver.

Silver Trading Hours

- The London Silver Market trades from 8:00 am to 4:30 pm on weekdays, London time

- LBMA Silver Price auctions occur daily at 12 noon during weekdays, London time

- COMEX silver futures trade electronically all day, from 6:00 PM Sunday to 5:00 PM Friday, New York Time

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