NEW YORK Gold's rise to a fourth consecutive record high unraveled late on Tuesday as the dollar strengthened and an increase in silver futures margins sparked a wave of profit-taking in precious metals.
Gold futures hit a record in early trading on safe-haven buying fueled in part by concerns about Irish and Portuguese debt. But gold reversed course in the U.S. afternoon. It managed to settle higher, but in electronic trade after the settlement, gold fell back below $1,400, down more than 1 percent from Monday's close.
Precious metals had made substantial gains since the Federal Reserve announced more easing last week. Some analysts said it was vulnerable to a sell-off, some analysts said.
Silver reversed from a 30-year high in record high trading volume, falling in tandem with oil and grains.
Silver exchange-traded fund trading volumes reached 10 times the average (Graphic: link.reuters.com/fef64q )
Shares of the iShares Silver Trust, an exchange-traded fund that tracks the price of silver, fell 3.6 percent on massive volume as more than 150 million shares changed hands, nearly 10 times the average daily volume over the last 50 days.
Many in the market appeared confused by mid-session gains in the U.S. dollar index .DXY, which was up 0.9 percent at 5:04 p.m. Unable to discsern a clear reason for the dollar's rise, dealers began to look closer at COMEX silver, where preliminary trading volume was over four times its average.
Some traders said a rise in margins to $6,500 a contract from $5,000 had aided the sell-off in a market that was due for a correction after outperforming gold in the past few months.
"The sell-off started because the market had gone too far too fast," said Frank McGhee, head precious metals trader with Integrated Brokerage Services LLC in Chicago. "The margin change added insult to injury," he added, but said it was not the primary factor driving the after-hours sell-off.
Gold had earlier risen in tandem with the dollar for a second straight day, as investors poured into both the metal and the U.S. currency as safe havens. Analysts said gold's unusual positive link with the greenback was similar to what happened earlier this year amid eurozone sovereign debt fears.
The euro struggled for a third straight session as investors worried about Irish and Portuguese debt and hedged sizable bets against the U.S. dollar. <FRX/>
Worries about inflation surfaced last week when the Fed set its latest bond-buying program. This initially weakened the dollar and powered commodity prices higher. Gold has gained nearly 30 percent this year so far and has risen as much as 8 percent since just before the Federal Reserve detailed its plans last Wednesday to buy $600 billion worth of Treasuries to revive the economy.
U.S. gold futures for December delivery settled up $6.90, or almost 0.5 percent, prior to the day's reversal.
Spot gold scaled a record at $1,424.02 an ounce, but then fell by 1.7 percent to $1,386 in late New York trade.
Gold had gained a lot due to the Fed's government bond buying program and was overbought, said Peter Buchanan, senior economist with CIBC World Markets in Toronto. A firming dollar and equities selloff also weighed on gold in late trade, he said.
Gold, a classic hedge against inflation, often gains when the dollar weakens and comes under pressure when the U.S. currency firms.
Spot silver surged as much as 6 percent to a 30-year high of $29.33, but later fell by more than 3 percent to $26.80 in exceptionally volatile trade even by silver market standards.
COMEX silver futures volume was above 191,000 lots, preliminary Reuters data showed, breaking the previous record of 127,890 lots set in 1976. The benchmark December contract settled up $1.474 at $28.906 an ounce.
The premium that investors are demanding to hold Irish and Portuguese government debt shot to record highs on concern about funding and potential default. This prompted European investors to seek a safe-haven investment such as gold. <GVD/EUR> <FRX/>
Also on the radar is this week's G20 summit. Officials from Germany, Brazil, China and South Africa are among those expressing concern that the Fed's policy could weaken the dollar and drive up commodity prices.
(Additional reporting by Barani Krishnan, Josh Schneyer, David Gaffen and John Parry in New York and Amanda Cooper and Pratima Desai in London; Editing by David Gregorio)