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Gold Bounces Back; Silver Struggles

Stocks in this article: KGC GG AEM EGO

NEW YORK ( TheStreet ) -- Gold prices were popping and silver prices were trying to stem an abrupt selloff Monday, which had hit markets overnight.

Gold for June delivery added 70 cents to settle at $1,557.10 an ounce at the Comex division of the New York Mercantile Exchange. After losing 2.5% to fall to $1,540.30, the metal rallied to $1,577. The spot gold price was down 72 cents, according to Kitco's gold index.

Silver prices for July were shedding $2.51 to settle at $46.08 an ounce, after plummeting 13%, bouncing off the $42.20 level. The U.S. dollar index reversed directions after an earlier rally and was losing 0.09% at $72.96. The U.S. dollar index was down almost 4% in April and still has yet to break below its record low of $71.

The selloff in gold and silver had been anticipated to some degree given the surge in prices. Both metals soared 8.92% and 28.72% in April, respectively, and many traders had been looking for an overbought correction.

"This had to happen," says Anthony Neglia, president of Tower Trading "all good bull markets give some back." Silver held the $42 level with the next support level of $40. Neglia, who predicted that silver would hit $50 before $40 in April, categorizes himself as the glass if half full trader. " Silver did have trouble getting through $50 but I still believe it can."

Silver is also being negatively impacted by new margin requirements from the CME, a 13% increase and the second in a week. Now it takes $14,513 to buy one speculative futures contract of 5,000 ounces of silver versus $12,825. The move makes silver more pricey to buy and also triggers selling by some who dump, now more expensive, positions.

" Silver sold off on only 9,000 lots," says Mihir Dange, trader at Arbitrage, "the last time margins were raised on silver we saw it take a tumble as investors sell their silver to raise additional capital. This could be the healthy pullback that silver needed to get new long in and weak longs out."

Jeff Nielson, guest contributor at TheStreet, argues that if there were a lot of long speculators "who piled-in after the last margin-hike, then this current move lower could last several days or perhaps a week ... but if all of the leverage in the sector had already been squeezed-out by the last margin-hike a week or so earlier, then this could be just a one- or two-day event."

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