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Silver plunges for a second day as some investors flee

May 3, 2011 | 11:56 am

Silver took its biggest dive in more than two years as some investors and traders cashed out after the spectacular run-up in the metal's price this year.

Gold also slid, although its losses were modest compared with silver.

Near-term silver futures in New York plummeted $3.50, or 7.6%, to $42.58 an ounce on Tuesday, the biggest one-day drop since December 2008, according to Bloomberg News data.

The steep slide followed a drop of $2.51, or 5.2%, on Monday, when selling began to swell after the gray metal reached a 31-year high of $48.58 an ounce on Friday.

1804silver Traders said one catalyst for this week’s pullback was another move by the Comex futures market’s parent, CME Group, to limit speculative activity in silver: CME on Monday raised margin requirements on silver contracts, meaning the cash deposits investors must put up or maintain to trade the contracts. It was the third increase in about a week.

With the boost in trading costs, “The weak ‘longs’ are getting out and it kind of snowballed,” said Jeff Friedman, a commodities strategist at Lind-Waldock & Co. in Chicago. A long investor is someone betting on continuing price gains.

But the sell-off hasn’t surprised any market pros, Friedman said. “We were way overbought,” he said.

Silver has rocketed this year, benefiting from inflation worries and investor demand for a hedge against the loss of purchasing power in paper currencies fueled by the dollar's continuing slide. The metal, though notoriously volatile, has become a favorite of many individual investors.

At Friday’s 31-year high silver was up 57% year to date after six straight weekly gains.

Shares of the iShares Silver Trust, an exchange-traded fund that directly invests in the metal, hit a record high of $47.22 on Thursday. The shares plunged 8.6% on Monday and were off $2.23, or 5.2%, to $40.60 at about 11:45 a.m. PDT Tuesday.

Meanwhile, gold futures in New York closed down $16.60, or 1.1%, to $1,540.10 an ounce after hitting a nominal record high of $1,556.70 on Monday.

Gold historically has been much less volatile than silver, in both directions. Gold was up 9.5% year to date through Friday, about one-sixth of silver’s advance.

Strength in the dollar on Tuesday helped fuel negative sentiment toward precious metals, although the greenback’s gains were modest. The DXY index of the dollar’s value against six other major currencies was up 0.2%. The index had hit a 32-month low on Friday.

-- Tom Petruno

Photo: An 1804 American silver dollar.