Silver and gold tumbled on Tuesday as investors sold on uncertainty about the direction of monetary policy in the United States, but a softer dollar helped support prices and sentiment.
Spot silver ceded nearly 5 percent to $44.61 an ounce after touching $49.31 an ounce on Monday, within reach of $49.48 hit in January 1980
It was bid at $45.77 an ounce at 1143 GMT from $46.90 late in New York on Monday and is heading for its biggest daily loss since March 15.
Gold hit a record high of $1,518.10 a troy ounce on Monday. It was last bid at $1,504.36 from $1,508.45 on Monday.
The rally has been strong, it's not surprising to see profit-taking ahead of the FOMC meeting, said Peter Fertig, a consultant at Quantitative Commodity Research.
Markets expect it will be a dovish statement from the U.S. Fed, but there are worries about them ending (Quantitative Easing) ahead of time.
Tighter U.S. policy would mean less cash floating around the financial system looking for a home and fewer worries about inflation, which investors protect against by buying gold.
The Federal Open Market Committee meeting starts later on Tuesday and concludes on Wednesday. The U.S. central bank is expected to confirm it will stick to plans to complete a $600 billion bond-buying program.
The post-meeting news conference by Fed Chairman Ben Bernanke on Wednesday will be the first regularly scheduled briefing by a Fed chief in the bank's 97-year history.
The ... meeting is a possible event risk but we believe post-meeting comments will confirm that U.S. short-term rates will remain low for the time being which would be positive for precious metals, Credit Suisse Private Banking said in a note.
The dollar fell to a 16-month low against the euro on expectations that U.S. monetary policy will remain accommodative compared to the European Central Bank, which has already begun to raise rates.
A lower U.S. currency makes metals priced in dollars cheaper for holders of other currencies, while gold often used by investors as a hedge against inflation is often triggered by high oil prices.
Oil is down, that's a negative factor, Fertig said.
Traders say part of the reason for the volatility in gold and silver prices is activity related to options -- contracts which give holders the right to buy or sell the underlying security at a fixed price in the futures.
There's been a rush to cover exposure to these contracts ahead of expiry (maturity), a trader said. It's been more pronounced in silver futures.
U.S. silver futures slid more than 5 percent to $44.61 an ounce. The contract rallied to $49.82 in the previous session, a hair off their record high of $50.35.
Silver prices are up about 50 percent so far this year after gains of more than 80 percent last year.
Some analysts say silver this year has rallied on expectations of rising demand from industrial consumers, particularly those in the solar panel industry as governments search for alternatives to nuclear energy after Japan's earthquake and tsunami.
Although demand for silver is certainly increasing from this quarter we do not believe it explains the entire rally in silver prices, HSBC said in a note.
Nonetheless the political climate may favor solar power and announcements regarding government support or increased research for solar panels may support silver. Much of the buying in silver has been retail and momentum driven.
Autocatalyst metal platinum was $1,811.74 an ounce from $1,819.30 and palladium was at $753.47 from $757.80.
(Editing by Alison Birrane)