Silver suffered its biggest two-day loss since 1987 on Tuesday, dragging down gold more than 1 per cent as speculators rushed to liquidate positions after COMEX's third margin hike in a week, traders said.
The 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 per cent since last August. Silver hit an all-time high within a whisker of $50 (U.S.) an ounce just last Thursday.
Gold likewise fell for a second day, 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 defied predictions of a collapse when technical indicators began showing red flags. But three margin hikes that have increased the cost of trading by 38 per cent 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 6 per cent to $41.25 an ounce by 2:35 p.m. ET, having briefly moved higher in extremely choppy trade. On Monday, the metal notched its biggest one-day drop in 29 months.
U.S. July silver futures , which had already settled prior to much of Monday's late losses, fell more than 10 per cent to settle at $42.585.
Spot gold dropped 0.9 per cent to $1,530.47 an ounce. U.S. June gold futures ended down 1.1 per cent 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 per cent decline.
Silver is now trading below its 20-day average after its sharp pullback, but it was well above its 100- and 200-day averages, after a 170 per cent 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.
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 per cent as of Monday.
OIL LOSING ITS SHINE
Oil prices dropped more than 2 per cent Tuesday as an interest rate increase by India added to concerns about demand and gains in the dollar helped spark a technical sell-off.
Brent crude broke under its 20-day moving average for the first time since November, sparking technical selling as the dollar rebounded and briefly turned higher against the euro.
The dollar index, which tracks the greenback against a basket of currencies, seesawed as it tried to recover from a three-year low and its late strength weighed on oil.
"The slide in oil has come in response to equities losses and the dollar entering positive territory," said Matt Smith of Summit Energy in Louisville, Kentucky.
"There was a bit of euphoria in equities markets yesterday following (Osama) bin Laden's death. Today the focus has returned to risk aversion and the economy."
Oil's negative correlation with the dollar -- a trade in which investors shift cash between the greenback, crude and other commodities as risk aversion rises and falls -- hit the highest level since late November.
Brent crude for June fell $2.67 to settle at $122.45 a barrel. U.S. crude for June dropped $2.47 to settle at $111.05 a barrel. Both contracts posted the biggest two-day percentage declines since April 12.
Oil's late slide added to earlier losses sparked as India's central bank raised interest rates more than expected, which could curb demand growth.
"There are concerns that higher interest rates could be a growth killer and that could be what is weighing down oil prices. India is one of the biggest emerging economies where a lot of global growth will come from," said Michael Hewson, an analyst at CMC Markets.
Brent trading volumes rebounded after being dampened by a holiday in Britain. U.S. trading volumes were on pace to total about half a million lots, near the 30-day average.
Traders also eyed news that China's state oil giants PetroChina and Sinopec had asked the government to cut a fuel consumption tax to reduce their refining losses.
China, the world's No. 2 oil consumer, has recently taken action, including raising interest rates and bank reserve requirements, to try to slow inflation and cool its economy.