Silver posted its largest one-day fall in six weeks Tuesday after having hit a 31-year high in the previous session, while gold was pressured by investor uncertainty over the likely course of U.S. monetary policy.
Spot silver fell by as much as 4.9 per cent to a session low of $44.62 (U.S.) an ounce, after having risen to $49.31 on Monday, its highest since touching $49.48 in January 1980.
High volatility and the expiry of U.S. silver options added to the intensity of the decline, impacting gold, which fell back from Monday's record of $1,518.10 an ounce ahead of the outcome of the two-day U.S. Federal Reserve policy meeting on Wednesday.
The Fed is expected to indicate that it is in no hurry to raise interest rates, while chairman Ben Bernanke will deliver the first regularly scheduled post-decision news briefing in the bank's 97-year history.
"We are seeing investors taking profits on the metal after this incredible run-up which was fuelled largely by speculators," said TD Ameritrade chief derivatives strategist Joe Kinahan.
"We often see this case in commodities where speculators will come in a bit late to the party looking for the trend to continue to be their friend," he said. "But the problem here is that silver was nearing all-time highs this week."
Silver finished down at $44.98 an ounce at 3:20 p.m. ET, compared with $46.90 late in New York on Monday, set for its biggest daily percentage loss since March 15.
Silver at-the-money implied options volatility has risen by over 35 per cent in the last four trading days to hit its highest level since mid-November.
U.S. silver futures saw record volume on Monday, with over 300,000 lots changing hands, with another 170,000 trading by 3:20 p.m. on Tuesday.
Silver futures for May finished down at $45.05, having closed at $47.149 on Monday.
The iShares Silver Trust , the world's largest silver-backed exchange-traded fund, also saw heavy trading, with a record 34.93 million shares trading on Monday and a further 20 million shares changing hands before 2:00 p.m. ET on Tuesday.
"Everyone has heard that silver is in a parabolic uptrend, but it now appears ready to take at least a respite to calm down a bit," wrote Larry McMillan, president of McMillan Analysis Corp, in a report.
Gold posted its second daily decline, in spite of the weakness in the dollar, which usually acts as an incentive to non-U.S. investors to buy the metal.
The spot price was last down 0.4 per cent at $1,502.40 an ounce, while U.S. gold futures for June delivery finished down 0.4 per cent at $1,503.50, trading between $1,492.00 and $1,508.50 during the session.
DOLLAR LINK WEAKENS
However, gold's usual inverse relation to the dollar has been weakening consistently since mid-April, meaning the bullion price will derive less of a bounce from any softness in the U.S. currency.
The dollar fell to a 16-month low against the euro on expectations that U.S. monetary policy will remain accommodative compared to the European Central Bank, which has already begun to raise rates.
Tighter U.S. policy would restrict the amount of cash in the financial system and could temper concern about inflation, which investors often protect against by buying gold.
The Federal Open Market Committee is expected to confirm it will stick to plans to complete its $600-billion bond-buying program.
Traders say part of the reason for the volatility in gold and silver prices is activity related to options - contracts which give holders the right to buy or sell the underlying security at a fixed price in the futures.
"There's been a rush to cover exposure to these contracts ahead of expiry," a trader said. "It's been more pronounced in silver futures."
Silver prices are still up about 50 per cent so far this year after gains of more than 80 per cent last year.
Platinum was last at $1,803.48 an ounce, down from Monday's last quote at $1,819.30, while palladium traded at $755.00 an ounce versus $757.80 on Monday.