Explained: Why silver ETFs are pricier than silver itself, and how a physical shortage has warped the market

Over the past week, leading Silver ETFs in India have traded well above their intrinsic value.

Silver’s stunning rally has set off an extraordinary chain reaction across markets -- and now, even exchange-traded funds (ETFs) that track the metal are showing signs of overheating. Over the past week, leading Silver ETFs in India have traded well above their intrinsic value, driven by frenzied retail demand and a widening shortage of physical silver.

Why did ETF prices surge beyond silver’s fair value this week?

Silver ETFs such as SBI Silver, HDFC Silver, and Axis Silver have soared between 9 and 13 percent in recent sessions. Yet, while ETF prices climbed sharply, MCX Silver December futures actually slipped 0.6 percent on October 9, revealing a disconnect between sentiment and fundamentals. “The frenzy is so strong that while ETFs are soaring in double digits, retail enthusiasm, not fundamentals, is driving the price chase,” said Apurva Sheth, Head of Market Perspectives & Research at SAMCO Securities.

Silver ETFs are designed to mirror the price of physical silver. Each unit represents a proportionate share of silver held by the fund or backed by silver-linked securities. But when investor demand overwhelms supply -- as it has this week -- ETFs can start trading at significant premiums to their net asset values (NAVs).

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Experts urge caution, explain price disparity

Amid the excitement, market leaders have sought to calm investor nerves. Venkat Chalasani, Chief Executive of the Association of Mutual Funds in India (AMFI), said the surge in ETF prices and premiums is not a structural concern but a “temporary phenomenon” caused by supply bottlenecks and speculative demand.

“The spot price is higher than the futures in terms of silver,” he said, describing an unusual condition where immediate demand far exceeds available supply. Chalasani added that the market should stabilise as supply catches up, noting that the current spike reflects a short-term imbalance rather than a flaw in the domestic ETF ecosystem.

The premium problem: why silver costs more in India

The current imbalance stems from both local and global shortages. “The way silver prices in India are determined is by taking the global silver price and converting it into rupees,” explained Nilesh Shah, Managing Director of Kotak Mutual Fund, on CNBC-TV18. “For example, if global silver is at $50 and the exchange rate is Rs 90 to a dollar, the base price is Rs 4,500. After adding import duty and GST, the fair import parity price is around Rs 5,000.”

However, due to tight supply and speculative demand, spot silver in India is now trading near Rs 5,500 per unit -- roughly 10 percent above the fair import parity value. Kotak Mutual Fund estimates the premium on spot silver jumped from 0.5 percent in early September to 5.7 percent on October 9, briefly peaking at 12 percent intraday. “This means investors buying our silver ETF are effectively paying about 10 percent more than the fair value,” Shah said, warning that such premiums are unsustainable.

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Kotak halts new inflows amid overheating

Separately, in a post on X (Twitter), Shah cautioned: “Premiums don’t last long. Their costs remain forever.”

To protect investors from overpaying, Kotak Mutual Fund has suspended lump-sum and switch-in subscriptions to its Kotak Silver ETF Fund of Fund, citing elevated spot premiums. Systematic investment plans (SIPs) and redemptions will continue as usual. Shah said if regulations allowed, he would have halted inflows into the ETF itself until premiums normalised. “We remain bullish on the asset class, but we don’t want this premium to be paid by our investors,” he said.

Market-wide frenzy

The surge in ETF prices mirrors soaring demand for silver as both a precious and industrial metal. Investors are betting on sustained strength due to booming use in solar panels and EV batteries, a fifth consecutive global supply deficit, and expectations of further US Federal Reserve rate cuts, which tend to weaken the dollar and lift metal prices.

In September alone, Silver ETFs saw record net inflows of Rs 5,341.67 crore, taking total AUM to Rs 36,460.94 crore, up nearly Rs 10,000 crore from August.

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