Commodities booming; other MFs may also halt silver ETF buys: Nilesh Shah

Our fund of funds isn't allowed to invest in silver futures, only in silver ETFs. So, we had no option but to pause fresh purchases - else, investors would enter at a 10 per cent premium, Shah said

As gold and silver prices skyrocket, Kotak Mutual Fund has announced a temporary suspension of lumpsum and switch-in investments in its Kotak Silver ETF Fund of Fund (FoF). Nilesh Shah, managing director of Kotak Mahindra AMC, tells Puneet Wadhwa over a telephonic conversation the reasons for this sudden move, and the road ahead for equity & commodity markets in the next Samvat. Edited excerpts:

 

Kotak MF has stopped lumpsum, switch-in investments in silver ETF FoF. What’s the logic behind this sudden move?

 

The suspension was arrived at based on the price dynamics. The Kotak Silver ETF price is linked to global silver prices converted into rupees, plus import duty and GST. Let’s say the global price is $50 per ounce. Converted at Rs 90 per dollar, that’s Rs 4,500. Add about 7 per cent import duty and GST (goods and services tax), and the fair price becomes roughly Rs 5,000 per ounce. 

 

 

However, in the physical market, jewellers and bullion dealers are quoting around Rs 5,500 per ounce of silver. This is because there’s currently a shortage of physical silver — maybe due to a shipment delay, short covering, or festive season demand. Normally, such premiums are very small — typically around 0.5 per cent— but not 10 per cent. On Thursday, the premium peaked at around 12 per cent. 

 

So, when investors buy my Silver ETF, they are effectively paying Rs 5,500 instead of Rs 5,000. Since my fund of funds invests in that ETF, investors end up paying 10 per cent above the fair import parity price. The move to freeze was to protect investor interest. 

 

Do you expect redemption pressures in related schemes given the run up in gold and silver prices?

 

Our fund of funds isn’t allowed to invest in silver futures, only in silver ETFs. So, we had no option but to pause fresh purchases — otherwise, investors would enter at a 10 per cent premium. We’re advising investors that if they want exposure to silver, they can buy silver ETFs directly or invest in silver futures at prices that are 10 per cent cheaper than entering our FoF. This move is purely to protect investor interests, and I believe other fund houses will follow suit. No one wants to hurt investors.

 

Is the silver supply shortage artificially created, or is it genuine?

 

It’s a temporary aberration. Commodities always find their equilibrium. When the Hunt Brothers pushed silver prices to $50 in the 1980s, people started melting silver utensils — supply eventually came back. So, such premiums don’t last long.

 

In the past few months, was the rally in gold and silver running on fumes rather than fundamentals?

 

There are no traditional fundamentals to value gold or silver. Their value is perceptive — people believe they are stores of value and globally tradable, and hence they command a premium. The rally in gold prices began in 2022, when Russia’s forex reserves were frozen by Western nations. That prompted central banks worldwide to start accumulating gold, leading to a faster price rise.

 

Silver, being the “poor man’s gold,” followed. The gold-silver ratio was stretched, and silver also has industrial demand. In August, there was even a rumour that Saudi Arabia’s central bank had bought silver ETFs. 

 

So, all these factors — along with a weaker dollar and the US freezing Russian reserves — have driven central banks to diversify. They’ve been buying nearly 1,000 tons of gold annually for the past three years.

 

Do you expect this central bank buying to continue?

 

If we look at China’s gold reserves, officially they’re around 2,300 tons, but unofficially it could be 3,000 tons. The US holds about 8,000 tons. Undoubtedly, China would like to hold more. The way I see it — if central banks sell, gold prices will fall. If they stop buying, prices may correct slightly. But if they keep buying, gold will remain firm.

 

Between equity, gold, and silver — where should investors put their money now?

 

It’s not just about maximizing returns, but also about risk management. There’s no fundamental method to value gold or silver — they are perceived stores of value. One should not put a significant portion of your portfolio in precious metals. If the risk appetite allows, go ahead — but for most investors, I recommend a low double-digit allocation (10–12 per cent) to gold and silver combined. That said, we remain bullish on both, but don’t expect last year’s kind of returns or daily 3–4 per cent gains. It doesn’t work that way. There will be corrections, as seen in the past.

 

And what about equities?

 

Last year, equities were riskier while precious metals were safer. This year, the situation has reversed. Our markets haven’t delivered much in the past year, valuations have corrected, and the government is taking steps to stimulate growth. If we strike a tariff deal with the US, it could further help.

 

What kind of returns do you expect from equities over the next year?

 

Returns will depend on earnings growth. For fiscal 2026-27 (FY27), we expect earnings growth in the high single to low double digits, and investors should expect similar returns. Anything beyond that is a bonus.

 

Should investors stay away from gold and silver for now?

 

No, not at all. We remain bullish on both asset classes. But investors must watch central bank activity closely. If central banks start selling instead of buying gold, I would be the first to exit. 

 

Beyond gold and silver, every commodity — copper, platinum, etc. — seems to be on fire. Where are we in the overall commodity cycle?

 

We’re in an inflationary phase, which limits central banks’ ability to cut interest rates. Industrial metals are rallying because of huge demand from AI-driven data centers that use large quantities of GPUs. Trillions of dollars are being invested in AI infrastructure. A weaker dollar combined with AI-driven demand is pushing up metal prices.

 

The second-order effect of this is on monetary policy — over 160 rate cuts have been announced globally this year. But if inflation rises again, central banks might have to pause or reverse these cuts, which could affect global growth. So yes, it’s currently a boom phase for commodities, aided by a weak dollar and strong AI-related demand — and this looks set to continue for some time.