if traders are determining the price of a monthly contract for commodities such as a March contract or a December contract then how or who decides the cash or spot price?
Great question — the relationship between futures contracts and spot prices is a cornerstone of commodity markets. Here’s how it works:
🧮 Who Determines the Spot Price?
The spot price — also called the cash price — is the current market price at which a commodity can be bought or sold for immediate delivery. It’s not set by any single person or entity. Instead, it’s determined by:
- Supply and demand dynamics in the physical market
- Actual transactions happening in real time
- Price reporting agencies (like Platts or Argus for oil, or USDA for agricultural products) that aggregate and publish spot prices based on verified trades
- Commodity exchanges (like CME or ICE) that may list spot prices based on settlement data
So, the spot price reflects the real-world value of the commodity today, based on what buyers and sellers are actually willing to pay.
📈 How Futures Traders Influence Prices
Futures contracts — like a March or December contract — are agreements to buy or sell a commodity at a future date for a predetermined price. These prices are set in the futures market by:
- Traders’ expectations about future supply and demand
- Interest rates, storage costs, and transportation costs
- Seasonal factors (e.g., heating oil demand in winter, crop harvests in fall)
- Hedging activity by producers and consumers
- Speculation by investors trying to profit from price movements
While futures prices are influenced by spot prices, they also reflect expectations about the future — which is why they can be higher or lower than the current spot price.
🔄 The Link Between Spot and Futures Prices
There’s a constant interplay between the two:
- Arbitrage ensures that futures and spot prices don’t diverge too far. If they do, traders step in to profit from the difference, which brings prices back in line.
- As a futures contract nears expiration, its price converges with the spot price, because the contract is about to become a real transaction.
Would you like to dive into how this works for a specific commodity like crude oil, wheat, or gold? Each has its own quirks.
Today
silver cash is $49.87 and Dec is $47.47. that s more than $2 and seems too far from each other
You’re absolutely right to notice that — a $2+ gap between the spot price of silver ($49.87) and the December futures contract ($47.47) is unusually wide. Here’s what’s likely going on:
🧠 Why the Futures Price Is Lower Than the Spot Price
Normally, futures prices are higher than spot prices due to storage costs, interest rates, and time value. But when the opposite happens — called backwardation — it signals something unusual. Here are the key reasons:
1. Physical Shortage or High Immediate Demand
- If there’s a surge in demand for physical silver now (e.g., for industrial use or investor panic), the spot price can spike.
- Futures traders may believe this demand is temporary and expect prices to normalize by December.
2. Market Manipulation
- Silver is one of the most heavily manipulated commodities. Large institutions have been accused of using futures markets to suppress prices by selling large volumes of “paper silver” — contracts not backed by physical metal.
- This can create a disconnect between the futures price and the actual cost of physical silver.
3. Investor Sentiment and Hedging
- Traders might be bearish on silver’s future due to economic forecasts, interest rate expectations, or dollar strength.
- Hedgers (like miners) may be locking in lower prices now to protect against future declines.
4. Dislocation Between Physical and Paper Markets
- Spot prices often reflect physical silver, which includes premiums for minting, delivery, and scarcity.
- Futures prices reflect paper contracts traded on exchanges like COMEX, which may not fully account for physical constraints.
🔍 What This Means for You
- If you’re buying physical silver, expect to pay a premium over spot — and much more than futures.
- If you’re trading futures, the market may be pricing in a correction or normalization by December.
- If you’re investing long-term, this could be a signal of undervaluation — or manipulation — depending on your view.