The trouble with silver ETFs in a rapidly crashing market

Summary: The ongoing silver crash has exposed a problem most ETF investors never think about. ETFs are designed to track prices smoothly but only in normal markets. Read on to understand how ETF pricing, liquidity and exchange rules behave when markets move too fast.

A metal that rallies like a rocket can also slam into a circuit breaker, especially when ETFs meet a fast-moving global sell-off.

That's what many silver ETF investors discovered on Sunday morning, when markets opened for the Union Budget's special trading session. As prices plunged, they found themselves locked in, watching losses mount, unable to sell.

"Bought a Silver ETF yesterday. It became Silver WTF today," quipped a user on X (formerly Twitter) after silver prices on MCX crashed 27 per cent on Friday, wiping out over Rs 1 lakh per kg.

The joke captures Silver's personality rather well. It can behave like a sensible inflation hedge in the morning, a momentum trade by lunch, and a plumbing problem by closing time.

Why couldn't you exit your ETF

An ETF has two prices. One is its fair value (NAV or iNAV, where i stands for indicative), based on the underlying silver it holds, recalculated every few seconds during trading hours. The other is the last price it actually traded at on the exchange.

In calm markets, market-makers keep the two close through arbitrage. Buy the ETF cheap, sell the silver dear; or vice versa. The gap stays small. In volatile markets, the rulebook matters more than arbitrage.

Indian regulators set price bands to protect investors from wild swings. Sensible idea. But those bands are anchored to a base price using the NAV from two trading days ago (T-2).

SEBI has been reviewing this, considering a shift to T-1 iNAV, precisely because the current method can drift away from real-time conditions during fast markets.

So, when global silver gaps down overnight, the ETF's real-time value plummets immediately. But the exchange's circuit breaker is still using the stale NAV (when prices were higher) as its reference point. So the permitted trading range, say 20 per cent above and below the price from two days ago, sits well above where the ETF actually should trade today.

Here's how it works: Two days ago (T-2), your silver ETF's official NAV was Rs 100. The exchange sets a 20 per cent band around it: the ETF can trade between Rs 80 and Rs 120 today.

But overnight, global silver crashes 27 per cent. By morning, the fair value of your ETF, based on current silver prices, is Rs 73. You want out. Any price will do. But the exchange won't allow trades below Rs 80 (the circuit floor). 

So sellers are desperate to exit at Rs 73. Rational buyers won't pay more than Rs 73. Orders pile up. Nothing executes. The market gets frozen.

Gold ETFs, meanwhile, mostly traded normally. Gold's 10 per cent fall was sharp but stayed within the circuit bands. Only silver, with its 27 per cent crash, broke the machinery.

What triggered the crash

Now to the price story. Silver had been making headlines for all the right reasons through January until it remembered that gravity exists.

The immediate catalyst was US President Donald Trump's nomination of Kevin Warsh as the next Federal Reserve Chair. Warsh is perceived as hawkish on inflation and sceptical of aggressive rate cuts. For silver, a non-yielding asset, higher-for-longer rates are bad news.

In London and New York, silver had pushed to record territory earlier in the week, touching $121 per ounce, only to slump hard as investors took profits and the dollar steadied.

For context: silver was barely $30 an ounce at the start of 2025. It had gained nearly 150 per cent for the year before this week's rout. Even after the crash, it remains around $100 per ounce globally, still double where it started.

The long-history warning

This isn't silver's first spectacular crash. The metal has a brutal history.

The 1980 spike peaked at $49.45 per ounce before collapsing. That episode, driven partly by the Hunt brothers' attempt to corner the market and ended by COMEX's "Silver Rule 7" margin restrictions, saw silver plunge from $50 to $10.80 on 'Silver Thursday'—a single-day collapse of over 50 per cent.

In April 2011, silver again traded around $49.80 per ounce before retreating fast. Within a week, it had shed 20 per cent.

Between spikes, there are long stretches when silver does not so much compound as hibernate. That's why 'silver-only' portfolios tend to create dramatic anecdotes and disappointing timelines.

And yet, even those historic episodes now look modest. Silver's 2025-26 run took it past $83 in December and touched $121 in January before this week's rout. The precedents warn us: what goes up spectacularly can come down just as fast.

What to expect next

In episodes like this, the next few sessions usually look less like investing and more like traffic management.

• A day or two of circuit pinning is plausible. If fair value remains below the permitted band, you can see "stuck at lower circuit" behaviour: lots of sell orders, few buyers, thin prints.
• Then a reset, followed by messy price discovery. Once the base price and NAV inputs catch up, bands adjust and trading resumes. But spreads can be wide, and volatility remains high. Silver does not return to being polite simply because it has stopped screaming.
• The temptation: buying the dip with the wrong tool. If you buy while the ETF is distorted by bands, you risk paying above fair value because the "right" price is not allowed to print. That is not bravado; it is a mechanical error.

What a sensible investor does now

A few boring rules, precisely because silver is not boring.

• Treat silver as a satellite, not a core. If it's big enough to ruin your sleep, it's too big.
• Use limit orders, not market orders. In locked or thin sessions, the difference is your money. Base limits on fair value, not the last traded price.
• Watch iNAV and fair value, not just market price. The last print can be a hostage to the band. AMCs publish iNAV on their websites, typically updated every 10-15 seconds during market hours.
• Prefer diversification. Combining silver with gold, or holding it through a broader multi-asset allocation, reduces the chance that one metal dictates your mood.
• Understand the difference between price risk and liquidity risk. Physical silver holders face the former but not the latter—there are no circuit limits on bullion, though also no instant liquidity. ETF holders face both.

Silver may have another rally. The question is whether you will still be around, and still solvent, when it arrives.

In other words: enjoy the silver lining. But read the circuit-breaker manual first.

How to safely take exposure to silver?

Silver can play a role in your portfolio, but only in the right proportion and through the right vehicle. At Value Research Fund Advisor, our analysts can help you choose suitable funds, size exposures sensibly and avoid concentrated bets that can hurt during market stress. Give it a shot and pick the right funds easily.

Try Fund Advisor