Investors beware, silver squeeze could end post-Diwali
Surging investment demand has drawn new investors into silver at record prices — but analysts warn the rally may fizzle after Diwali as supplies improve and prices correct.
The silver squeeze, which got underway last week amid surging investment demand for silver exchange traded funds (ETFs) and physical bars and coins, could begin easing after Diwali, said trade officials. They warned that this may hurt investors who recently entered the white metal counter with high hopes. Diwali festivities run from 18–23 October.
Currently, domestic silver futures are trading at a 7–8% discount to spot prices, reflecting an inverted market—where spot trades higher than futures rather than the other way around. This anomaly could reverse when supplies pick up, potentially causing sharp losses for investors who entered the market this month lured by quick gains, analysts said.
84% surge so far
Tradesmen cautioned investors about an unfavourable risk-reward ratio, with silver already generating a hefty 84% return so far this year. The first half of this month alone accounted for 11.5% of the total rise—from ₹87,578 per kilo in January to ₹1,61,400 as of 5:40 pm IST Wednesday, per the MCX front-month or active silver contract, which trades between 9 am and 11:30 pm on the country’s largest metals and energy derivatives exchange.
“There is no shortage in the international market for silver," said Shekhar Bhandari, president, Kotak Mahindra Bank. “I expect the logistics to ease by the end of October and the backwardation in silver to reverse as the temporary supply crunch eases."
Trump tariffs, shutdown spur demand
September, at 15.9%, holds the distinction of generating the highest monthly return for any month this year, but October looks likely to surpass it unless the supply crunch eases.
Though supply has lagged demand this year, a massive crunch arose last week amid heightened safe-haven buying linked to Trump tariffs and the prolonged US federal government shutdown, said Gnanasekar Thiagarajan, director of commodity research firm Commtrendz.
This rush pushed up silver ETF premiums and prompted several mutual funds—including Kotak MF, Tata MF, and SBI MF—to temporarily halt fresh investments in their silver ETF Fund of Funds due to abnormally high premiums.
ETFs trade at steep premiums
For instance, Kotak Mutual Fund, which suspended fresh subscriptions to its silver Fund of Funds last week, saw its silver ETF price surge 10.7% to ₹168 last Thursday, even as spot prices traded at ₹159 a gram—implying a 6% premium versus the usual 50–100 bps, said Satish Dondapati, fund manager, Kotak AMC.
Apart from ETFs, the most glaring impact of the shortage is seen between active silver futures on MCX and spot prices. While futures traded at ₹1,61,400 intraday Thursday, the spot price closed at ₹1,74,000 per kilo. This means the futures are trading at a 7.8% discount to the spot price, an abnormality seen during times of severe crunch in physical market.
“The discount reflects the supply crunch, which could reverse when silver supply starts flooding the domestic market. That will shrink premiums and lead to losses for new investors who just entered the counter," warned Thiagarajan.
Once supply improves, futures could again trade at a premium to the spot market, analysts said.
Chirag Sheth, principal consultant (South Asia) for Metals Focus, a precious metals research consultancy, said investors jumping in at current prices on expectations of mammoth returns as seen YTD could be in for a "big disappointment."
He estimates silver to top out at $57 an ounce next year, up from $52 levels currently.
Bhandari of Kotak Mahindra Bank agreed on moderate returns ahead but declined to specify a level.
Silver, like gold, has rallied this year amid rising investment demand and global economic uncertainty tied to Trump tariffs. Investment demand in India between January and September stood at 2,256 tonnes—out of total demand of 7,040 tonnes over the same period, according to Metals Focus.
This compares with 1,859 tonnes of investment demand during all of 2024, when total demand was 7,072 tonnes.
Against total demand of 7040 tonnes , estimated silver supply in the nine months of the current calendar was 5305 tonnes, per Metals Focus.
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