Gold and Silver ETFs Take a Hit: A Deep Dive into the Market’s Reaction

Yesterday’s trading session was particularly tumultuous for gold and silver exchange-traded funds (ETFs), as they experienced significant declines after a surprising announcement from U.S. President Donald Trump. His declaration that he would not resort to military action to annex Greenland seemingly eased some geopolitical tensions, resulting in a notable shift in market sentiment.

Silver ETFs Hit the Hardest

In the silver ETF segment, Tata Silver ETF stood out as the worst performer, plunging by 16.31% by the market’s close. Other notable losers included the Aditya Birla Silver ETF, which fell 13.74%, and the Mirae Asset Silver ETF, down by 12.61%. Here’s a glance at the worst performers:

Declining Gold ETFs

Silver wasn’t the only precious metal to suffer; gold ETFs also faced significant declines. The ABSL Gold ETF, Tata Gold ETF, and Axis Gold ETF each saw their NAVs drop by more than 9%. The hardest-hit gold ETFs include:

What Drove the Market Decline?

The sudden drop in ETF values can be traced back to a nuanced reaction to President Trump’s announcement. According to Tanvi Kanchan, Associate Director at Anand Rathi Shares & Stock Brokers, a 1-2% decline in silver prices was observed alongside a fluctuating silver market, which briefly peaked at $95.87/oz before retreating. Kanchan highlighted that the root of this drop was the easing of geopolitical tensions, which diminished the perceived need for safe-haven assets that had previously fueled a remarkable 150% rally in prices.

Ravi Singh, Chief Research Officer at Master Capital Services Ltd, added that traders engaging in profit booking and unwinding their safe-haven positions contributed to the market’s downturn. He reassured that these movements should be viewed as corrections rather than major crash-level declines.

NAV vs. Trading Prices

A critical distinction to understand in the context of these ETFs is the difference between Net Asset Value (NAV) and trading prices. The NAV reflects the actual value of the underlying assets in the ETF, while the trading price can fluctuate based on market demand and supply dynamics. “Many gold and silver ETFs were trading at a premium to their NAV because of speculative buying," says Prithviraj Kothari, Managing Director at RiddiSiddhi Bullions Ltd. This premium created volatility, as evidenced by the sharp declines witnessed when markets corrected.

For instance, if a silver ETF with an NAV of ₹100 was trading at ₹125, the subsequent drop could lead to significant percentage losses for investors despite only a minor change in NAV.

The Broader Market Impacts

Tanvi Kanchan emphasizes that while spot silver was trading at around $94.97/oz, ETFs are expected to align closely with these values due to arbitrage mechanisms in place. The recent pullback is seen as a consolidation phase rather than a trend reversal, suggesting that ongoing supply deficits and heightened industrial demand continue to underpin the market.

Market experts believe the next upward movement for precious metals will hinge on several key factors, including Federal Reserve policy decisions, potential renewed tariff threats, and significant price thresholds like the psychological $100 mark for silver.

Long-term Investment Perspective

For long-term investors, this recent decline in ETF prices may represent a sound buying opportunity. Kothari advises against panic selling, particularly if the ETFs are now trading closer to their NAV. Instead, a staggered investment approach or systematic investment plans (SIPs) could be wise.

Singh also suggests a cautious approach when deciding to open new positions. He emphasizes the importance of waiting for stable market trends before making significant investments in gold or silver ETFs.

Investors are encouraged to view precious metals as a hedge for portfolio diversification rather than as immediate profit generators. Singh stresses moderating gold and silver holdings due to their volatility, advising that these assets should serve more as capital preservation tools in uncertain economic climates.

By understanding the recent dynamics affecting gold and silver ETFs, investors can make informed decisions in navigating the market’s complexities, ensuring their portfolios remain resilient in the face of change.