Silver suffered its biggest two-day loss since 1987 on Tuesday, dragging down gold more than 1 percent as speculators rushed to liquidate positions after COMEX's third margin hike in a week, traders said.
The more than 7 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 of 2 percent and marking its biggest correction since early January. The death of al-Qaida 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 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 6 percent to $41.25 an ounce by 2:35 p.m. EDT (1835 GMT), 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 percent to settle at $42.585.
Spot gold dropped 0.9 percent to $1,530.47 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 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 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.
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.
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