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Gold, Silver Prices Free Fall on Dollar Rally, Margin Hikes

NEW YORK ( TheStreet ) -- Silver prices tanked after another margin hike from the CME and a stronger U.S. dollar, taking Gold prices along for the ride.

Gold for June delivery plummeted $33.90 to close at $1,481.40 an ounce at the Comex division of the New York Mercantile Exchange, but has fallen as much as $45 in after hours trading. The gold price has broken through $1,500, trading as high as $1,522.10 and as low as $1,471.80. The spot gold price was down almost $50, according to Kitco's gold index. George Gero, senior vice president at RBC Capital Markets, says that gold might see a pullback to the $1,450-$1,500 range "before recovery sets in and back to basics. Preliminary higher open interest figures now show new shorts and hedgers afraid to miss profit taking selling." Gero also says that miners are starting to hedge gold and silver to lock in higher prices in case the selloff continues. Friday could see some short covering and some "evening out" prior to the weekend, he argues.

Silver prices were falling $3.17 to $36.24 an ounce below the $37.87 area, which was the last settlement level in March before April's 31% rally.

The CME announced it would raise the amount of money it takes to buy a 5,000-ounce silver contract by another 33%. As of May 9, the initial speculative margin will rise to $21,600 making it the fourth raise in two weeks.

Clearing houses and exchanges reportedly hike margins to make sure traders actually have the cash to back up their positions, which supposedly protects against volatility. The idea is that it shakes out the "hot" money, or froth, or big leveraged bets, from the market.

Anthony Neglia, president at Tower Trading, has turned bearish on silver as promised after it broke below $38, "the next major level of support is $36, there was a quadruple top there in March before we broke out so now that becomes support ... If that level happens to fail, $32 rings a bell." Neglia is watching to open interest volume to see when the metal gets oversold.

Silver's selloff has been fast and furious and has taken gold with it. The SPDR Gold Shares (GLD) dropped almost 5 tons on Wednesday while the iShares Silver Trust (IAU) shed 521.8 tons bringing the total to 626.49 for May.

But not all exchange-traded funds are seeing this kind of mass selling. Tim Harvey, senior vice president at ETF Securities, said he hasn't seen any major redemptions from its gold and silver physically backed ETFs in the U.S. ETFS Physical Gold (SGOL) and ETFS Physical Silver (SIVR).

"I think it says that the people using us at the moment are the asset allocators and the investors ... if you're a day trader I think you've been finding your access to silver through futures or other means but if you've been an investor in silver for the medium and long term, you've been with us," Harvey said.
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