With the premium on silver exchange traded funds (ETFs) via the fund of funds (FoF) route having shot up to as much as 12% over spot prices, fund managers are pulling the plug on these investments. After four asset management companies — Kotak, SBI, UTI and Tata — halted investments via FoFs, two others, ICICI and Axis, followed suit on Tuesday.
On Tuesday, prices of silver in the local market touched an all-time high of Rs 1.76 lakh per kilogram. They had hit $52.37 per ounce in the international market on Monday. Prices in the home market have been on a tear since January having soared a staggering 105%.
The premium in local silver prices, experts point out, directly impacts the valuation of the schemes since buying now means paying more than the actual value of the asset.
As Satish Dondapati, fund manager, Kotak Mahindra AMC, told FE, once the supply normalises and the ETF prices align with the white metal’s true value, investors can buy closer to the net asset value. Rushing in now could be a mistake.
No one’s quite sure when the shortage of physical silver will ease. Bloomberg reported that silver lease rates — which represent the annualised cost of borrowing metal in the London market — have been persistently high this year, but surged to more than 30% on a one-month basis on Friday.
“A jump in demand from India in recent weeks has drawn down the supply of available bars to trade in London, following a rush to ship metal to New York earlier this year after worries that the metal could be hit with US tariffs sparked large dislocations between the two trading hubs,” the Bloomberg report noted.
Unlike the physical market for gold ETFs, the one for silver ETFs is less stable, hence the soaring premiums. However, since ETFs are freely traded instruments, suspending trades on exchanges, for a temporary time, is not feasible.
The silver market “is less liquid and roughly nine times smaller than gold’s, amplifying price moves,” Goldman Sachs Group Inc. analysts wrote in a note, the Bloomberg report said.
Globally, silver-backed ETFs have seen record inflows with infusions in the first half of 2025 exceeding the total seen in 2024. In the domestic market, inflows into silver ETFs have more than doubled to Rs 14,000 crore in the January-September period, compared with Rs 6,500 crore in the same period last year.
Like gold, silver is priced in US dollars in the international market. When the dollar weakens, silver tends to become relatively cheap for buyers using other currencies. That pushes up silver prices.
For five consecutive years, the demand for silver has outstripped supply. Over half of the total silver demand now comes from industrial users, especially sectors like electronics and solar energy.
Investors must note that silver prices are very volatile and can remain depressed for extremely long periods. For example, silver prices in the global market fell 75% from the highs of $48 per ounce in April 2011 to the lows of $12 per ounce in March 2020 and recovered to new highs this year.