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.

Harvey thinks the recent selloff doesn't represent a fundamental shift in the precious metal's market. Inflation is still rising worldwide with the U.K.'s reading at 4%, EU at 2.7%, U.S. at 2.1%, China at 5.4% and India at almost 9%.

High inflation and low rates equal negative real interest rates (the interest rate minus the inflation rate). Even with the European Central Bank's recent rate hike and and no increase at today's meeting, the real interest rate is still a negative 1.45%.

Investors flock to gold and silver in that kind of environment as their cash in the bank is worth less, making the metals a safe place to stash wealth. The ECB decision to leave rates at 1.25% was pressuring the euro and boosting the dollar, which was putting pressure on gold and silver. The U.S. dollar index was adding 1.42% to $74.15. Short dollar, long euro has been a recent popular trade, which could also be unwinding now and further explain this intense and violent selloff in dollar-backed commodities.

Some news that was overshadowed Wednesday was a report that the Bank of Mexico added 93 tons of gold to its reserve holdings recently following Russia and Bolivia, which bought gold in the first quarter.

There have been rumors that China, which officially owns 1,054 tons of gold, is looking to add more gold and the metal's 4% selloff from recent highs might be a good catalyst.

"The corrections over the past few days have taken some of the overbought froth out of the markets," said James Moore, research analyst at FastMarkets.com. "But with issues such as negative real-interest rates, eurozone debt concerns and MENA unrest still ongoing investors are still likely to view dips favorably with a test below $1500 in gold and $38 an ounce in silver likely to find fresh demand."

Harvey also believes that gold and silver will have to wait until Monday to get further direction. The London bullion market has had two shortened trading weeks, and with volume light it's hard to get a feel for how the bullion market will respond to gold and silver's volatile ride over the past two weeks.

"It's still the capital of the bullion market," said Harvey, "so we are not going to be able to call this until we see what is going on next week."

Bullion dealers like Nick Barisheff, CEO of Bullion Management Group, says he hasn't seen any panic selling from gold and silver buyers. He notes that sophisticated investors "bought puts to protect their positions" as it is too risky to dump bullion into the selloff, as the fundamental factors, as he sees them, haven't changed. "Once the selloff is over I think we will be continuing on same trajectory."

Gold mining stocks were tanking. Barrick Gold ( ABX) was down 2.79% to $46.77 while Newmont Mining ( NEM) was sinking to $54.71. Other gold stocks, Goldcorp ( GG) and AngloGold Ashanti ( AU), were trading at $48.50 and $45.53, respectively.

Goldcorp reported solid earnings Wednesday after the close making 50 cents a share on revenue of $1.2 billion, which was slightly light. The fast-growing gold miner produced 637,600 ounces of gold and sold 98% of it. Cash costs were $188 an ounce counting silver sales from its fully ramped up Penasquito mine and $504 on a stand alone basis, higher than the previous quarter.


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-- Written by Alix Steel in New York.

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