Silver drops on stimulus worries, technicals; gold follows

SINGAPORE (Aug 20)  Silver slid nearly 4 percent on Tuesday, falling a second straight session after its biggest rally in five years, as worries over the U.S. stimulus outlook and technical selling dragged it lower and gold followed. Silver was already edging down in early Asian trading but once prices fell through Monday's low of $22.94 an ounce, stops were triggered, causing a sharp sell-off, traders said.

Gold was wavering between losses and gains earlier but fell as much as 0.9 percent after silver crashed. This is the yellow metal's second straight session of losses after posting its biggest weekly gain in five weeks. "We need a correction. The rally looks a bit overdone to me," said one Hong Kong-based precious metals trader. "The correlation with the dollar and U.S. yields have not been working at all since last week." Gold prices typically fall as bond yields improve and the U.S. currency strengthens. Last week's 5 percent rise in gold was largely due to technical buying after prices rose above the $1,350 mark and some support from physical buying in Asia.

The focus has now shifted to looking for further signals on the Federal Reserve's stimulus measures when the U.S. central bank on Wednesday releases minutes of its July policy meeting. Spot gold fell to a low of $1,352.2 an ounce before paring some losses to trade down 0.6 percent at $1,357.85 by 0726 GMT. Silver fell as much as 3.7 percent, after posting a 13 percent gain last week. Silver had gained for 8 consecutive sessions as of last Friday. U.S. benchmark bond yields hit a two-year high near 3 percent on Monday and major U.S. stock indexes fell for a fourth straight session as markets braced for the Fed to start withdrawing its economic stimulus. The yield on benchmark 10-year Treasury notes is up sharply from 1.60 percent in early May, before the Fed started signalling its intentions to pare back its quantitative easing if the economy continued to strengthen. "Once September rolls around, gold's upside becomes more suspect and we could be in store for a much more concerted decline as we think that the Fed will indeed deliver its first tapering instalment," INTL FCStone analyst Edward Meir said.

PHYSICAL DEMAND Buying from China was quiet on Tuesday, traders said. Shanghai gold futures fell 1 percent on Tuesday after a three-session rise. Indian traders said they will start importing gold again over the next week, after the county's central bank clarified a rule that stopped the flow of the precious metal into the top gold consumer at the end of July. Data from the U.S. Mint showed that August sales of American Eagle gold bullion coins stood at just 3,000 ounces as of Monday, far lower that the 39,000 ounces for the whole of August last year and the monthly average of almost 100,000 ounces for the first seven months of this year