Silver is hitting all-time highs, but not everyone is getting to join the party.
In India, strong seasonal demand coupled with a significant supply shortage is creating a deeply disrupted silver market. Prices are behaving erratically, imports have plunged, and the supply/demand situation may remain broken for a while.
The situation has started to spill over into the financial markets, where investment managers have begun suspending silver purchases for their clients because of the dangerous market conditions.
That happened not once, but twice, over the past week in India. With demand high and liquidity weak, it could be just the first of many such announcements.
Two fund houses hit pause on silver ETF investments
Effective Oct. 10, Kotak Mutual Fund, a fund provider in India, shared that it was temporarily suspending lump-sum and switch-in subscriptions to its Silver ETF Fund of Fund.
The primary reason given? Silver in India was trading at a significant premium to global prices, due to a significant disconnect between supply and demand.
The fund’s Managing Director Nilesh Shah said on social media:
Keeping in mind the high spot premium for silver over the import parity price, Kotak MF is suspending lumpsum subscriptions in Kotak Silver ETF Fund of Fund. SIPs and redemptions will continue as before in the regular course of business. Kotak Silver ETF, being a listed fund, doesn’t have a provision for suspension.
Nilesh Shah, Kotak Mutual Fund managing director
Days later, UTI Asset Management in India made a nearly identical announcement, saying it also was pausing new lump-sum and switch-in investments into its Silver ETF Fund of Fund for essentially the same reason.
Both fund houses cited domestic silver premiums trading 8 to 10% above global spot prices, reflecting severe supply/demand imbalances.
While most investors are focused on silver prices hitting all-time highs, structural problems are emerging under the surface that could have major implications for silver moving forward.
Why silver ETFs are facing a shortage problem
As with any commodity, there are local market factors to consider.
In India, the Diwali holiday is approaching. That event usually comes with a surge in demand for jewelry and other products that contain silver.
At the same time, the demand for silver for industrial uses has also skyrocketed. The clean energy boom, where silver is a component of electric vehicles and solar panels, has created competition for the metal.
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Increased demand tends to drive prices higher, but that effect can be magnified when it’s paired with scarce supplies.
The biggest problem, however, is that India is the world’s largest silver importer.
India gets an estimated 80% of its silver supply from other countries. It’s also building out clean energy and AI infrastructures, so silver resources are especially tight at the moment.
High demand and low supply are creating a rare set of circumstances that are having an alarming impact on investors and the global commodity markets.
How the silver shortage affects current investors
The suspensions don’t impact all purchases into these silver ETFs. Only lump-sum and one-time purchases are being halted for the time being. Those making systematic investments or transfers will be allowed to continue.
For their part, Kotak has stated that it will resume subscriptions once the spot premium decreases to more acceptable levels and more normalized supply/demand conditions return.
But it’s tough to say when that will happen. The AI and clean energy sectors are expanding at a rapid pace, and the materials needed to power them are likely to be in strong demand for a while longer.
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That could lead to further disconnects ahead for India and other countries heavily reliant on global imports for their supply.
U.S.-listed silver ETFs, such as the iShares Silver Trust (SLV), remain open and have actually benefited from renewed inflows as investors chase momentum.
Key takeaways:
- Two investment managers in India suspended purchases in silver ETFs.
- The move comes following severe supply/demand imbalances in silver.
- Demand for silver in AI and clean energy infrastructure could remain strong for a while.
- Silver just hit a new all-time high.
What it means for silver prices and the broader market
At one point, silver in India was trading at a 10%+ premium to international prices earlier in October. Even if that premium shrinks, it’s enough to disrupt a market that’s heavy on demand and light on supply.
The demand from Diwali is likely to subside once the festival passes, but the structural demand will almost certainly continue. Kotak has maintained a bullish long-term view on silver and reiterates that the silver ETF closure is merely procedural and not a negative outlook.
While expectations for silver are positive, supply/demand imbalances can still be dangerous for investor returns.
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