Gold fell from a record high 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 per cent, as speculators scaled back their bullish bets on increased futures margins and a technical overhang after a 170 per cent 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 per cent. The CBOE gold volatility index, 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 (U.S.) 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 per cent at $1,558.09 an ounce by 2:26 p.m. ET, 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 per cent 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'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 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 auto catalysts, were mixed after Honda Motor Co 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 per cent to $1,869.50 an ounce, while palladium dropped 1.5 per cent to $777.22 an ounce.
CRUDE OIL SEES VOLATILE TRADE
Oil slipped on Monday in volatile trading as investors weighed the effect on crude futures and other markets from news that U.S. forces killed al Qaeda leader Osama bin Laden.
Brokers and analysts said oil's early tumble and the U.S. dollar's initial bounce after news of bin Laden's death did not alter the factors that have pushed the greenback to three-year lows against a basket of currencies and did not end turmoil in Africa and the Middle East that has supported oil prices.
"It will increase the volatility because of unknowns, the prospect of retaliation, and uncertainty," said Richard Ilczyszyn, senior market strategist at Lind-Waldock in Chicago.
Oil bounced up after the early decline on lift from an Iran state television report that Israeli military aircraft were massing at a U.S. base in Iraq. The Pentagon dismissed the report as "ridiculous" and Israel said it had no knowledge of such a plan.
Brent crude for June fell 77 cents to settle at $125.12 a barrel, reaching $126.54 after an early slide to $121.67. Brent's 2011 peak of $127.02 was reached on April 11.
U.S. crude for June fell 41 cents to settle at $113.52, having reached $114.83, the highest intraday price since hitting $130 on Sept. 22, 2008, after bouncing from an earlier $110.82 low.