Thinking of buying silver this Dhanteras? After a frenzied rally, the precious metal may not be worth the hype

Gold had been on the ride of a lifetime since economic and policy uncertainty drove central banks to hoard the precious metal instead of the US dollar. What had started off as gold’s sheen rubbing off on silver, has evolved into a full-blown rally in the industrial metal that now outperforms gold.

Silver is up 30% in barely a month, and almost 90% up so far in 2025 compared to gold’s 65%. Where is it headed?

Silver’s high conductivity and low reactivity give it a unique advantage in new-age industrial applications including electronics, solar energy, and electric vehicle batteries apart from use in medicine, chemistry and jewellery. In the fight for rare earths, the US has also proposed adding silver to its list of critical minerals. But industrial use alone does not justify the recent frenzied rally in the metal.

A supply squeeze, rise in safe haven demand, and a boom in silver ETFs have all added to the demand-supply imbalance pushing up prices. While that adds to silver’s appeal, investing in this precious metal comes with certain additional risks apart from the ones usually associated with buying overinflated assets.

The domestic premium risk

In India, domestic prices tend to command a premium to global prices. Currently, new silver buyers are reportedly paying a 5-12% premium over global prices. That’s 5-12% shaved off their returns at the time of purchase itself.

To be sure, the tendency of the rupee to depreciate against the dollar, logistics costs, import duties, and other taxes tend to make local silver prices higher than global rates.

In an efficient market, the difference would be arbitraged away. But this time around, the premium is too steep, and supply shortages, compounded with the rise in demand during the festival and wedding season, have prevented immediate arbitrage.

So, the difference has persisted longer than it usually does. There is even more to the story.

The spot price for silver has recently trended higher than its futures price. This phenomenon, known as backwardation, signals a squeeze in supply or near-term excess demand. An eventual reversal to a typical contango market (one where futures prices are higher than spot) can lead to corrections and losses for investors.

The ETF boom and not all that glitters

The risk in investing in silver ETFs lies in the inefficiencies in this market.

The Securities and Exchange Board of India (Sebi) had permitted silver ETFs in November 2021. ETFs offer several advantages over holding the physical metal—higher liquidity, greater security, guaranteed purity, greater transparency, and no storage costs. So, it is no surprise that as the metal has rallied, the silver ETF industry has boomed as well.

From three silver ETFs in March 2022, we currently have 21 ETFs and fund of funds tracking the metal. The assets tracking silver through these investment vehicles have also exploded from ₹777 crore in March 2022 to more than ₹35,000 crore at the end of September 2025. Of this, ₹10,000 crore were inflows in September alone.

That amounts to a massive 47-fold jump in just about 3 years. To be sure, silver has also rallied during the period, but by less than 90%. This is to say, most of the assets under management expansion in silver ETFs has come from accelerating inflows into the metal. But this steep appreciation in appeal has come with its own set of downsides.

All ETFs have some degree of inefficiency; an investor never gets a perfect one-on-one translation from ETFs to underlying assets. The 0.3-0.7% expense ratios of silver ETFs as well as their tracking errors take away from purity of exposure. This has made for a wide variance in returns. For example, an investor in the Motilal Oswal Silver ETF would have made 46% in the past one year, while investing in Tata’s silver ETF would have yielded 83%.

On the top of this, silver ETFs have overheated amid unceasing retail enthusiasm. The net asset values (NAVs) of silver ETFs have run up significantly ahead of their indicative NAVs (iNAV). NAVs are calculated at the end of the day by the fund house, and include the domestic premium over global prices. iNAVs are theoretical prices calculated on a real-time basis by third-party vendors, and represent the fair value of the underlying assets. When NAVs trend higher than iNAVs, as has been the case recently, it indicates that investors are overpaying. The difference between NAV and iNAV represents an additional layer of premium over and above the domestic premium.

In other words, those buying silver ETFs are taking on exposures which are increasingly different from silver—domestic premium + expense ratio + tracking error + premium over iNAV. This has been all too apparent over several sessions in the past few weeks. We have seen silver ETFs rally 9-13%, even as December silver futures slipped by about half a percentage point.

The outperformance of silver ETFs over futures may seem like a good thing – more return for ETF investors. But the truth is far from it.

Such deviations between the NAVs of investment vehicles and the underlying assets eventually converge. The chicken has already come home to roost. On 16th October, as fresh inventory hit the markets, we saw a long-overdue mean-reversion. Silver ETF NAVs crashed by up to 10%, even as silver futures held their ground.

By overpaying through overheated silver ETFs, investors are setting themselves up for steeper declines in NAVs than silver itself. To prevent this, Kotak, SBI, UTI and Groww AMCs have already stopped accepting fresh lumpsum investments and switch-ins into their silver funds.

Other risks loom too

Silver is often dubbed the devil’s metal, thanks to its propensity for steep price declines. Like any other metal used in industrial applications, its price is extremely sensitive to economic cycles. For example, when the Euro area crisis triggered a global economic slowdown during 2011-13, silver corrected by 60%.

Now, we are staring at heightened policy uncertainty and trade protectionism, which can result in an economic slowdown. At the same time, silver’s high cost and growing application in new-age industries leaves it vulnerable to technological evolution away from the metal. Near-term risks can come from festive demand easing off. Given its expensive valuations, silver could be staring at another price decline if any of these risks materialize.

Rounding it up

Investors would do well to steer clear of the hype. Those looking to take on silver exposure should do so being well aware of the risks its entail as outlined above. Sure, some silver exposure in the portfolio would be prudent from a diversification point of view. But the deviation between spot and futures, domestic and international prices, and iNAV and NAV should be closely tracked before making investment decisions. And new silver exposure should be built in a slow and staggered manner, rather than in one whimsical FOMO-driven sweep.

Ananya Roy is the founder of Credibull Capital, a SEBI-registered investment adviser. X: @ananyaroycfa

Disclosure: The author does not hold shares of the companies discussed. The views expressed are for informational purposes only and should not be considered investment advice. Readers are encouraged to conduct their own research and consult a financial professional before making any investment decisions.