Gold falls and silver drops 4 percent after bin Laden death

NEW YORK Mon May 2, 2011 3:13pm EDT

A man looks at gold jewellery displayed at a shop in Amman's gold market April 25, 2011. REUTERS/Ali Jarekji

A man looks at gold jewellery displayed at a shop in Amman's gold market April 25, 2011.

Credit: Reuters/Ali Jarekji

NEW YORK (Reuters) - Gold fell from a record high on Monday and silver notched its biggest one-day loss in seven weeks after the killing of Osama bin Laden sapped the safe-haven premium out of precious metals.

Silver bounced off early lows after falling as much as 11 percent, as speculators scaled back their bullish bets on increased futures margins and a technical overhang after a 170 percent rally over the last 12 months to a record high last week.

Gold initially rose to a record high for a fourth consecutive session, but news of the al Qaeda leader's killing by U.S. forces sent gold down almost 2 percent. The CBOE gold volatility index .GVX, a gauge of bullion investor anxiety, posted its biggest-ever two-session gain since its inception in September last year.

"People are pulling out of gold and going back into the equity market, as the news had a de-risking effect on the geopolitical environment," said Steven Faber, analyst at Haber Trilix Advisors, which manages $2 billion in assets.

Investor buying later lifted bullion off its lows after data showed U.S. manufacturing activity slowed in April for a second straight month but input prices reached their highest level in nearly three years.

Spot gold was down 0.4 percent at $1,558.09 an ounce by 2:26 p.m. EDT (1826 GMT), after hitting a record high for a fourth straight session at $1,575.79. U.S. June gold futures settled up 70 cents at $1,557.10 after ranging from $1,540.30 to $1,577.40.

Gold's losses were limited by inflation worries, the financial health of some euro zone economies, jitters over the U.S. budget deficit, and ultra-accommodative U.S. monetary policy, analysts said.

Markets across large parts of Asia and much of Europe were closed for May Day and Labor Day holidays, reducing the number of participants and making for volatile trading.

Silver was down 4.1 percent at $45.82 an ounce, having fallen as much as $5 to a two-week low of $42.58. U.S. silver futures volume was nearly three times above its 250-day average, one of the busiest days in 2011.

"We see selling from hedge funds and recent buyers placing sell-stops on the bin Laden news, thinking that risk premiums may be shifting," said George Gero, vice president at RBC Capital Markets.

SILVER PARES LOSSES, TRACKS GOLD

Silver's sell-off began last week when U.S. futures margin requirements were raised twice, and as the metal's failure to extend record highs above $50 an ounce triggered technical selling.

Data showed speculators had scaled back their bullish bets recently in COMEX silver futures and options to the lowest since early February, even as prices neared the psychological $50 level, U.S. regulator CFTC said Friday.

CME Group Inc (CME.O) sharply raised its maintenance margins for U.S. silver futures twice last week, making it more expensive for silver speculators to trade.

Ole Hansen, senior manager at Saxo Bank, said silver's volatility was at an unprecedented level.

GOLD/SILVER RATIO BOUNCES

Some traders attributed silver's sharp fall to an unwinding of a short gold-silver ratio position, compounded by automated stop-loss orders.

The gold-silver ratio, used to measure the number of silver ounces needed to buy an ounce of gold, rebounded to about 34 from below 32, its lowest level since the early 1980s.

"There is nothing from a fundamental perspective to cause a fall this large. Silver has been the most rapidly appreciating of the metals in the past months and if there was one that looked a bit frothy it was silver," said Ben Westmore, commodities economist at National Australia Bank.

"This is mostly technical. We expect silver to be in relatively close step with gold and while both have risen strongly, silver may have moved a bit too far ahead," he said.

Platinum group metals, mainly used as autocatalysts, were mixed after Honda Motor Co (7267.T) said several models in its line-up, including the Fit and Civic Hybrid cars, will be in short supply until later this year due to auto parts shortages in Japan following the earthquake and tsunami.

Platinum edged up 0.3 percent to $1,869.50 an ounce, while palladium dropped 1.5 percent to $777.22 an ounce.

(Additional reporting by Jan Harvey in London, Rujun Shen and Nick Trevethan in Singapore; Editing by John Picinich)

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