U.S. silver headed for third day of loss, drags down gold

(Reuters) - U.S. silver futures dropped more than 3 percent on Wednesday, down for a third straight session, and gold faltered as precious metals came under pressure to correct after a strong rally in the last few weeks.

COMEX silver has tumbled 15 percent in the past three sessions, wiping out gains from a rally that started in mid-April and pushed prices to a 31-year top just below $50 on April 25.

"On the way up, it (silver) was too fast and now we are seeing a general liquidation of long positions," said a Singapore-based trader.

"Silver has been falling much faster than gold, but it doesn't mean that silver will collapse from here."

The immediate support level for silver is seen around $39, its 50-day moving average, he added.

Spot gold hit record highs in 11 out of the past 14 sessions, and has held relatively steady compared to silver by falling just under 3 percent from a record of $1,575.79 touched on Monday.

COMEX silver hit a near three-week low of $40.47 earlier. It shed 3.4 percent to $41.13 an ounce by 0607 GMT, extending an 8-percent loss from Tuesday, after the CME Group hiked margin requirement for the third time in a week.

Higher margins make speculation more expensive, adding to the pressure on silver prices.

Spot silver fell by 1.3 percent to $41.11.

Investment interest in silver ebbed, as holdings in the iShares Silver Trust, the world's biggest silver-backed exchange-traded fund, dropped to a seven-week low of 10,909.06 tonnes, 4 percent off the record high hit on April 25.

The gold-silver ratio, used to measure how many ounces of silver is used to buy an ounce of gold, recovered to a one-month high of 37, from below 32 last week, its lowest since early 1980s.

Spot gold declined half a percent to $1,532.81 an ounce, also headed for a third straight day of loss.

COMEX gold lost 0.5 percent to $1,533.20.

Beyond the correction, gold and silver are expected to resume their upward trend, as worries about rising inflation and ongoing unrest in the Middle East and North Africa, as well as low U.S. interest rates may continue to drive investors to these precious metals, traders said.

CHINA INFLATION OUTLOOK

Chinese inflation is expected to moderate in the second half of the year as government measures to curb price rises hit their mark, said a senior central bank official.

The statement is unlikely to dampen the long-term sentiment in gold, traders and analysts said.

"It doesn't turn the market around. All the actions will only slow down the pace of inflation," said the Singapore-based trader.

China has raised interest rates four times since last October and hiked banks' required reserve ratio to a record level, to fight stubborn inflation.

"China's rate hikes tend to have a rather short-lived impact on global gold market," said Li Ning, an analyst at Shanghai CIFCO Futures. "The key is when the United States will start increasing rates."

The European Central Bank, which has raised interest rates last month, is expected to signal its readiness to hike rates again when it meets on Thursday.

(Source: http://www.reuters.com/article/2011/05/04/businesspro-us-markets-precious-idUSTRE73786N20110504)