Chapter 8 PERFORMANCE OF THE CHICAGO SILVER Introduction As detailed in Chapter 7, fundamental economic factors were the basis for the recent advance and decline of silver prices, both futures and cash. The question remains, however, as to how well the Chicago futures market performed during this volatile period. The following pages evaluate this performance from several perspectives: (1) The movement of cash and futures prices (that cash and futures move in the same direction is one of the fundamental tenets of futures trading); (2) the role of the futures market as a price discovery vehicle; and (3) the use of futures as a means of hedging against increased fluctuations in price. This evaluation establishes that the Chicago silver futures market was able to and did perform its economic role. A. Price Movements Vis-A-Vis Other Markets The silver market is an international market with active cash markets in London and New York and futures markets Silver in Chicago, New York and abroad, principally London.1/ prices in all markets tend to move together as there is tight worldwide arbitrage of prices. To determine how well silver cash and futures prices tracked each other during the recent 1/ There are active cash markets in Zurich and Singapore as well. Although no cash quotes are published for these markets, bid-asked quotes can be obtained from industry sources. price cycle, correlations between cash and futures are examined. High positive correlations mean the prices of cash and futures moved together. Table 1 shows the monthly correlations between cash silver prices and silver futures prices during the period April 1979 through March 1980. During the period of greatest price movement (August through March), the correlations were generally above the .90 range. The close interrelationship between all price series is indicated by their high mutual price correlations. These correlations demonstrate that futures and cash did move together. Further, they suggest that the information affecting silver prices -- cash and futures was the same in all major world silver markets.2/ - [Table 1 follows). 2/ The correlation of Chicago current futures and the average Zurich bid-asked spread (4:00 p.m. Zurich quote) was .985 for the April 1979 through March 1980 period. The correlation of Comex current futures prices with domestic cash prices was slightly higher than correlations with Chicago prices because of locational differences (both Comex and the cash market prices are New York-based quotes). 8-2887 |