Silver ETFs sink up to 20% as speculative frenzy unravels

Mumbai: Silver exchange-traded funds (ETFs) tumbled in a panic sell-off on Thursday, with several schemes plunging 15-20% during the day – far sharper than the 2-3% decline in spot silver prices. The steep divergence followed an abrupt unwinding of speculative positions built over the past few weeks as the sudden reversal of the recent record-breaking rally took investors by surprise.

Tata Silver ETF slumped16%, while Silverbees, ICICI Prudential Silver ETF, and Zerodha Silver ETF tumbled 10-11% on Thursday. Spot Silver was up 3.1% at $96 per ounc, after falling as much as 2.6% earlier in the day.

“A decline in the underlying spot appears to have led to a sharp sell-off in the ETF instruments with supply pressure outweighing demand significantly, leading to a wider divergence versus the spot,” said Nirav Karkera, head of Research, Fisdom.

Earlier in the day, Tata Silver ETF nosedived as much as 24%, Zerodha Silver ETF plunged 20.7%, Silverbees dropped up to 19.8%, while ICICI Prudential Silver ETF declined 19%. Market participants said the near-vertical drop in early trade could have been accentuated by forced selling triggered by margin calls by brokers. The sharp rally in silver – one of the best-performing assets in recent months – had prompted many traders to take bets based on borrowed money. Domestic silver prices surged 102% in the last three months and 243% over the past year.

The run-up, which had drawn hordes of individual investors to ride the bullish wave, had resulted in silver ETFs trading at a sharp premium to the MCX prices of late.

“These ETFs track LBMA (London Bullion Market Association) pricing while retail investors follow MCX,” said Anindya Banerjee, head of Commodity and Currency Research at Kotak Securities. “So when authorised participants or market makers’ selling on Thursday triggered a price drop, that fall set off stop-losses and some panic selling from retail investors.”

Thursday’s decline was primarily driven by Donald Trump’s comments at Davos, indicating that the US would not use force to take over Greenland. That remark reduced geopolitical anxiety and trimmed safehaven demand for gold and silver. “Local factors also weighed on sentiment, with some reversal in the prevailing speculations that import duties on gold and silver could be raised in the upcoming Union Budget,” said Arun Sundaresan, head of ETF, Nippon Life India Asset Management. “Against this backdrop, panic selling and profit-booking led to a sharp fall in ETF prices in the morning session.” Most of India’s gold and silver demand is met through imports. With the recent surge in prices imports shot up, resulting in a widening of the trade deficit and putting pressure on the rupee. Pankaj Arora, national president, All India Jewellers and Goldsmith Federation said the premium in silver prices was built up on rumours of a potential government hike in silver import duties. “As the rumours turned false, investors ran to exit, which led to a sharp fall in prices,” he said.

Arora said ETF investors remain at a structural disadvantage because they can trade only until 3.30 pm, while MCX trades until midnight, allowing traders in the futures market a longer window to adjust positions to international cues. Fund houses cautioned retail investors against chasing silver at elevated levels, given the metal’s inherent volatility. “Investors looking to add silver ETFs should track the iNAV.

If the ETF quotes at a significant premium to the iNAV, it’s better to wait for prices to stabilise,” said Niranjan Awasthi, senior vice president, Edelweiss Mutual Fund. iNAV or Indicative Net Asset Value is a realtime estimate of an ETF’s fair value during market hours. Banerjee said much of the excess exuberance has now been flushed out of the market, and he remains bullish on silver over the next 12 months.