Silver prices fell nearly five percent on Tuesday, snapping a rally in previous sessions that had carried them close to a record high, as option traders sold back metal to cover risks ahead of options expiry later in the day.
Spot silver prices had exploded in Monday's session, soaring to within 17 cents of the 1980 record high as options sellers bought silver when key strike levels at $45 and $50 came under threat of exercise.
People are watching out for options expiry, said Yingxi Yu, an analyst at Barclays.
There are decent-sized open interests at the strike levels of $40, $45 and $50. When there are large positions, it tends to suggest that prices may sway to those levels on options expiry.
U.S. silver futures tumbled nearly 5 percent to $44.86 an ounce by 0418 GMT, after having rallied to $49.82 in the previous session, a hair off their record high of $50.35.
Spot silver dipped 4.4 percent to $44.84.
The market will remain very nervous, and we'll see how it goes after option expiry, said a trader in Singapore.
Spot gold fell by 0.7 percent to $1,497.25 an ounce, after a seven-day record-setting rally that pushed prices to $1,518.10 on Monday.
U.S. gold also lost 0.7 percent to $1,497.90.
There is high open interest at key strike levels of $1,500 and $1,520 on COMEX gold, which will keep prices stable until at least later in the day, traders also said.
Investors are eyeing the U.S. Federal Reserve's policy setting meeting, due to kick off later in the day.
Fed chief Ben Bernanke is scheduled to give a news briefing on Wednesday -- the first regularly scheduled by a Fed chief in its 97-year history -- that is expected to shed light on the central bank's policy stance.
The market will be watching out for any signs of what the Fed is going to do at the end of the second round of quantitative easing, said Yu of Barclays.
If Bernanke remains dovish, as he has been, it will provide indication that monetary policy will not be tightened significantly in the second half, which is pretty favorable for precious metals.
The dollar <.DXY> edged up on Tuesday, but is still seen wobbly, even after the euro slipped on remarks from the European Central Bank Governor Jean-Claude Trichet that a strong dollar is in the interest of the United States.
Platinum group metals fell in tandem with gold and silver. Spot platinum fell off a seven-week high of $1,836.74, down 1 percent to $1,801.99.
Spot palladium declined 1.2 percent to $749.
Precious metals prices 0418 GMT
Metal Last Change Pct chg YTD pct chg Volume
Spot Gold 1497.25 -11.20 -0.74 5.48
Spot Silver 44.84 -2.06 -4.39 45.30
Spot Platinum 1801.99 -17.31 -0.95 1.95
Spot Palladium 749.00 -8.80 -1.16 -6.32
COMEX GOLD JUN1 1497.90 -11.20 -0.74 5.38 17564
COMEX SILVER MAY1 44.86 -2.29 -4.85 44.99 33349
COMEX gold and silver contracts show the most active months
(Additional reporting by Nick Trevethan in SINGAPORE; Editing by Clarence Fernandez)