Gold, silver retreat from highs along crude

By Frank Tang

NEW YORK (Reuters) – Gold and silver hit new highs on Monday before falling in tandem with crude oil, as safe-haven bids faded and as investors heeded a recommendation from long-term commodities bull Goldman Sachs.

After hitting a record high $1,476.21 an ounce earlier, gold was pressured on an African Union’s Libya peace initiative. Silver also backed off a 31-year high, snapping an eight-session winning streak.

New option volume and open interest records were set in the world’s biggest silver exchange traded fund after a huge block of put options were bought.

“The war premium in the metals seems to have diminished as news that a possible ceasefire in Libya and the willingness to negotiate a settlement is weighing on the market,” said George Nickas of commodities futures broker FC Stone.

Spot gold fell 0.7 percent to $1,462.28 an ounce by 3:26 p.m. EDT (1926 GMT), the biggest one-day gain in nearly a month. U.S. gold futures for June delivery settled down $6 at $1,468.10.

Bullion was under heavy pressure after Goldman claimed there was a strong chance that commodities prices might reverse and recommended clients take profits on what has been a hugely profitable trade.

Investors cautiously eyed the peace plan, which collapsed within hours after Libyan leader Muammar Gaddafi’s forces shelled a besieged city and rebels warned of no deal unless he was toppled.

The rolling one-hour correlation between gold and oil rose to a one-week high of 0.7, as the link between the two strengthened as recent sharp rally in crude oil prices also prompted investors to buy gold as an inflation hedge.

Activity in U.S. gold futures was sharply lower than usual at less than 110,000 lots. In contrast, U.S. silver trade was approaching 120,000 lots, about one-third higher than its 30-day average, one of the busiest days of the year.

Spot silver retreated from a session high of $41.93, the strongest since 1980. It later fell 0.4 percent to $40.68 an ounce.

The spreads between gold and silver — showing the relative strength between the two metals — have nearly halved since last August. The gold-to-silver ratio also fell toward its lowest level in recent decades after the Hunt Brothers cornered the silver market in the early 1980s.

Graphic on gold-silver ratio: http://r.reuters.com/jyx88r

“After three years of undervaluation, silver is now looking expensive again. Silver will also be more vulnerable than gold to a slowdown in the global economy,” Capital Economics strategists said in a note.

‘RETAIL FLOWS INTO SILVER’

Despite Monday’s decline, investor money has flowed into precious metals so far this month as investors worried about the potential for rising inflation in developing markets and changes to monetary policy in the United States.

Holdings of the world’s largest gold-backed exchange traded fund, SPDR Gold Trust, climbed 6 tons to about 1,217 tons as of Friday — the strongest level in nearly a month.

The No. 1 iShares Silver Trust said holdings held at a record at 11,192.80 tons.

A huge 100,000-lot block of July out-of-the-money $25 puts in the iShares Silver Trust were bought at 10 cents per contract, setting record highs in new option volume and open interest since the ETF’s options were listed in December 2008, said Trade Alert president Henry Schwartz.

Among other precious metals, platinum was down 1.3 percent at $1,780.24 an ounce, while palladium dropped 1.6 percent to $777.72.

(Additional reporting by Doris Frankel in Chicago and Jan Harvey in London; editing by Alden Bentley and Jeffrey Benkoe)

Gold, silver retreat from highs along crude