Are Silver Prices Determined in the Futures Market?
HalfDime
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Are Silver Prices Determined in the Futures Market?
Yes, silver prices are predominantly determined in the futures market, particularly on exchanges like COMEX.
How Silver Prices Are Set
The spot price of silver—the price used as a benchmark for buying and selling physical silver—is largely established by the prices of high-volume, near-term silver futures contracts traded on major exchanges such as COMEX and NYMEX.
These futures contracts are standardized agreements to buy or sell a specific quantity of silver at a predetermined price on a future date, and they are actively traded by commercial users (miners, refiners, manufacturers) and non-commercial participants (banks, hedge funds, speculators).
Why the Futures Market Dominates Price Discovery
The futures market is highly liquid and operates nearly 24/7, making it the primary venue for price discovery. The collective actions of traders—hedging, speculating, and reacting to news—determine the prevailing market price for silver.
The spot price, which is referenced globally for physical silver transactions, is directly influenced by the prices set in the futures market rather than by immediate physical supply and demand.
Disconnect Between Physical and Futures Markets
Physical demand (such as retail buying of coins and bars) does not directly set the global price, as most price-setting happens in the futures market. This can lead to situations where physical shortages or surpluses do not immediately impact the spot price.
Major participants in the futures market, such as miners and refiners, often hedge by taking short positions, while speculators may trade based on macroeconomic news, further decoupling futures-driven prices from physical market fundamentals.
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I have posted how prices of silver are determined because there is a flaw in how prices for commodities are set, namely being in the futures market. During the 2008 financial collapse, crude oil prices went negative because of the futures market, but nobody could buy into the market at negative prices (it meant they were paying people to take the crude oil off their hands).
We just saw the futures market say silver is not more valuable even though we had a major war strike happen, because the futures market probably assumed that demand for industrial would drop the same amount as the hoarding demand created by retail. Is that where silver should actually trade at?
We saw with oil prices that the futures market can be wrong, yet we have to pay what others project the value will be.