Silver slides again on margin hike, gold falls

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

NEW YORK (Reuters) - Silver suffered its biggest two-day loss since October 2008, dragging down gold and other commodities on Tuesday as speculators rushed to liquidate positions after COMEX's third margin hike in a week, traders said.

The 5 percent slide in silver, which rattled other markets and exacerbated a retreat in oil prices, came as more analysts questioned its ability to extend a rally that had lifted prices by more than 150 percent since last August. Silver hit an all-time high within a whisker of $50 an ounce just last Thursday.

Gold likewise fell for a second day, losing nearly 2 percent and marking its biggest correction since early January. The death of al Qaeda leader Osama bin Laden on Monday prompted a small measure of profit-taking from the ultimate safe-haven asset, but silver stole the limelight.

While silver is a much smaller market more prone to volatile trade, it had commanded wider attention as it defies predictions of a collapse when technical indicators began showing red flags. But three margin hikes that have increased the cost of trading by 38 percent since last Tuesday has shaken the market, according to analysts.

"We are seeing accelerated margin selling in silver ... and it's spilling over into gold and crude oil. When you have big margin selling in one commodity, it has a cascading impact on the markets," said Bill O'Neill, partner of New Jersey-based commodity investment firm LOGIC Advisors.

Spot silver fell 5 percent to $41.70 an ounce by 4:30 p.m. EDT, having briefly moved higher in extremely choppy trade. It hit a three-week low of $40.64, after posting its biggest one-day drop in 29 months on Monday.

U.S. July silver futures, which had already settled prior to much of Monday's late losses, fell more than 10 percent to settle at $42.585, with volume topping 170,000 lots, one of the busiest days of 2011.

Spot gold dropped 0.4 percent to $1,537.95 an ounce. U.S. June gold futures ended down 1.1 percent at $1,540.40 after trading from $1,516.20 to $1,551.40. It touched a record high of $1,575.79 on Monday.

Silver's decline sent the gold/silver ratio to a three-week high toward 37 from just below 32 last Thursday. Silver's sudden drop coincided with the fall of other commodities led by crude oil's 2 percent decline.

Silver is still one of the top-performing commodities of the year, having risen by 35 percent so far in 2011.

Market participants are waiting for the key U.S. non-farm payrolls data due on Friday, which should offer evidence of the ability of the economy to generate jobs, something which the Federal Reserve has flagged as a key concern.

TECHNICAL SELLING

Silver is now trading below its 20-day average, which it has largely held since February.

(Graphic: r.reuters.com/wuv39r)

It was still well above its 100- and 200-day averages, after a 170 percent rally over the last 12 months to a record high $49.51 an ounce set on April 28.

"Silver has been, in the short term, overextended. Its divergence from its moving averages has been extreme," said Robert Lutts, chief investment officer at Cabot Money Management which manages $500 million in client assets.

"Every pullback in the past two to three months have been met with pretty good buying. I don't think that is changing," said Lutts. However, he added that gold could fall as much as 5 percent before rebounding.

Investors remained wary of a market in almost chronic surplus with high price volatility.

Some of this discontent has been reflected in the futures market, where COMEX speculators cut their long positions by the biggest amount in two years last week., while redemption by silver exchange traded funds also increased by nearly 4 million ounces.

Holdings of the largest silver-backed ETF, New York's iShares Silver Trust fell 0.1 percent as of Monday.

Losses in platinum group metals, mainly consumed as autocatalyst, were relatively limited as General Motors Co (GM.N) and Ford Motor Co (F.N) posted encouraging April sales.

Platinum dropped 0.2 percent to $1,840.70 an ounce, while palladium edged up 0.4 percent at $772.50.

(Additional reporting by Amanda Cooper and Pratima Desai in London and Rujun Shen in Singapore; Editing by John Picinich and Sofina Mirza-Reid)