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The surge in demand for silver ETFs has pushed their prices notably above the Net Asset Value (NAV) they hold. ICICI Prudential Silver ETF, for instance, saw its NSE price jump over 6.4% to ₹313.91 in a single session. UTI Silver ETF climbed approximately 5.5%, while Aditya Birla Sun Life Silver ETF advanced nearly 5% on NSE.
Regulatory Duty Hike Speculation
Market watchers attribute this trend to investor anticipation of a potential government hike in silver import duties. Such a move would directly inflate domestic prices, prompting early exposure acquisition. Investors are increasingly turning to these ETFs as a liquid way to gain exposure.
Financial Flows Outpace Physical Demand
This rush is evident in the significant financial flows into ETFs. December witnessed ₹15,000 crore in inflows into gold and silver ETFs, a substantial increase from November's ₹5,000 crore. A senior mutual fund official noted that actual physical demand is considerably weaker, with gold jewellery demand down 15-20% and ample physical supply remaining abundant.
Futures Market Dynamics and Price Discrepancies
Adding to the price momentum is short covering by traders who had bet on falling prices. These traders are now forced to buy back positions, amplifying buying pressure. The cost of holding silver in futures markets has also spiked due to high volatility, with implied volatility in options reaching 50-70%, signaling intense speculative activity.
Navneet Damani, Head of Research Commodities at Motilal Oswal Financial Services, pointed to a price discrepancy between MCX futures and physical market rates. The derived price is near ₹2.95 lakh, while the physical market trades closer to ₹3.25 lakh, indicating a substantial premium. Late-evening rallies in MCX futures have further inflated ETF prices, as ETFs track these movements. Compared to the latest MCX price of around ₹3.30 lakh, current ETF prices near ₹3.15 lakh are still adjusting, though they reflect a significant premium over underlying value. Experts believe that until physical demand strengthens or speculative activity cools, these premiums are likely to persist due to hyperactivity and mispricing driven by options and speculative demand.