Why Silver ETFs Can Suddenly Stop Trading and What It Means for Investors
About Silver ETFs and Their Role in Indian Portfolios
Silver Exchange Traded Funds (ETFs) have steadily gained popularity among Indian investors as a convenient way to participate in precious metal price movements without dealing with physical storage, purity concerns, or security risks. These ETFs mirror domestic silver prices and are designed to provide liquidity, transparency, and ease of access through stock exchanges.
However, recent market developments have surprised many investors when silver ETFs effectively stopped trading due to technical circuit limits. This episode has triggered confusion, anxiety, and questions about whether something is fundamentally wrong with silver as an asset. In reality, what played out is a structural feature of ETFs that most investors rarely pay attention to—until volatility spikes.
Understanding the T-2 NAV Based Circuit Limit Mechanism
Unlike equities, ETFs operate with circuit limits that are calculated from the T-2 day Net Asset Value (NAV), not from the previous day’s market price.
As per exchange regulations, ETFs are subject to a maximum circuit movement of 20 percent from the NAV calculated two trading sessions earlier (T-2). This design is intended to prevent excessive deviation between the ETF’s trading price and its underlying asset value.
In the case of silver ETFs, extreme volatility in international silver prices caused the market price to fall below the permitted lower circuit threshold derived from the T-2 NAV. Once this condition is triggered, sell orders cannot be executed because the price has already breached the allowable downside range.
This does not mean trading is suspended by the exchange. It simply means that the ETF cannot trade below the lower circuit price, effectively freezing selling activity until price alignment improves.
Why Silver ETFs Faced a Complete Liquidity Freeze
When last traded prices fall below the lower circuit derived from T-2 NAV, no fresh sell transactions can occur on the exchange.
This phenomenon applied across the entire industry. Silver Bees and all competing silver ETFs were affected equally because the circuit logic is universal. It was not specific to any fund house, asset management company, or product structure.
The important point for investors to grasp is that liquidity disappearance in this case is mechanical, not fundamental. The ETF units continue to exist, the underlying silver remains priced globally, and NAV calculations continue in the background. What pauses is only the ability to transact on the exchange.
Why Gold ETFs Continue to Trade Normally
Gold ETFs have comparatively lower volatility, which gives them more room before hitting circuit thresholds.
In the same market environment, gold ETFs retained approximately 12 percent downside room before encountering their lower circuit. As a result, Gold Bees and other gold ETFs continued to trade normally, even as silver ETFs became temporarily illiquid.
This divergence highlights an often-overlooked difference between gold and silver. While both are precious metals, silver behaves far more like an industrial commodity. Its price reacts sharply to global growth expectations, currency movements, and speculative positioning, making it structurally more volatile.
Why This Is Not a Failure of Silver as an Asset
Liquidity freezes during extreme volatility are a feature of market safety systems, not a signal of asset collapse.
Many investors mistakenly interpret trading halts or circuit hits as signs of something fundamentally broken. In reality, such mechanisms exist precisely to prevent disorderly markets. Without circuit filters, ETFs could trade at irrational discounts to NAV, causing long-term damage to investor confidence.
Silver’s long-term investment thesis—whether for diversification, inflation hedging, or strategic allocation—does not change simply because short-term volatility triggers exchange safeguards. What does change is the investor’s understanding of how and when liquidity can vanish temporarily.
Key Lessons for Commodity ETF Investors
Commodity ETFs behave very differently from equity ETFs during periods of global stress.
First, investors must recognise that ETFs are not guaranteed liquidity instruments in all market conditions. They are exchange-traded vehicles governed by rules that can restrict trading under extreme price moves.
Second, silver’s higher volatility demands stricter risk management. Position sizing, allocation discipline, and investment horizon matter far more in silver than in gold.
Third, ETFs should not be treated as intraday trading tools during periods of panic. Commodity ETFs are better suited for planned allocations rather than reactionary trades.
Finally, understanding the mechanics of T-2 NAV-based circuits can prevent unnecessary panic when screens show no trades taking place.
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Should Investors Worry or Reassess Their Strategy?
Periods of forced inactivity often reveal more about investor psychology than asset quality.
For long-term investors, temporary illiquidity should not trigger emotional decisions. ETF prices will realign once volatility normalises and NAV-based circuits reset. For traders, this episode serves as a reminder that commodities can behave very differently from equities during stress events.
Silver’s role in a portfolio must be clearly defined. If the objective is diversification and long-term value preservation, short-term trading halts are irrelevant. If the intent is frequent trading, then silver ETFs may not be the right vehicle during volatile phases.
Investor Takeaway
Silver ETFs did not stop trading because of a structural failure or fund-specific issue. Trading was restricted due to the T-2 NAV-based circuit mechanism amid extreme volatility. Gold ETFs continued trading due to lower volatility and greater circuit headroom.
Investors should view this episode as a practical lesson in market mechanics, liquidity risk, and the importance of aligning investment products with risk tolerance and time horizon.
Explore more practical, experience-backed market insights at Indian-Share-Tips.com, which is a SEBI Registered Advisory Services.
SEBI Disclaimer: The information provided in this post is for informational purposes only and should not be construed as investment advice. Readers must perform their own due diligence and consult a registered investment advisor before making any investment decisions. The views expressed are general in nature and may not suit individual investment objectives or financial situations.
