Gold slides, silver tumbles ahead of Fed meeting

By Alix Steel, TheStreet

Updated at 2:50 p.m. ET

Silver and gold prices fell from recent highs Tuesday as the market turned its focus to the start of a two-day Federal Reserve meeting.

Gold for June delivery fell $5.60 to settle at $1,503.50 an ounce at the Comex division of the New York Mercantile Exchange. Gold traded as low as $1,492, while the spot gold price was losing $5.90, according to Kitco's gold index.

Silver prices tumbled $2.10, or more than 4%, to settle at $45.05 an ounce -- nearly 10% off recent highs. Gold is dealing with a much smaller sell-off, but neither slide is a surprise to traders.

Anthony Neglia, the president of Tower Trading, said silver would hit $50 before $40 and the metal came close at $49.82 on the Comex. At that level Neglia said "it would be a good place to take profits, no need to take it all off the table (and) then look for another buying opportunity maybe around $46 or so."

Stocks were rallying on strong earnings. The Dow Jones Industrial Average ($INDU) was gaining 118 points, or 1%, to 12,598. The S&P 500 Index ($INX) was adding 12 points, or 0.9%, to 1,347, and the Nasdaq ($COMPX) was rallying 24 points, or 0.9%, to 2,850.

Weighing on silver prices was a 9% increase in initial margin requirements on the Comex. It will now cost $12,825 to buy a 5,000-ounce futures contract, and traders could be dumping some positions before they have to pony up more cash.

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Continuing weakness in the U.S. dollar, however, should provide some support for gold and silver prices. The U.S. dollar index was down 0.25% to $73.84 Tuesday. Speculation that currency traders are covering their short positions headed into the two-day FOMC meeting is easing the dollar's recent sell-off and pressuring precious metals.

Although the Fed meeting won't deliver any groundbreaking results, Ben Bernanke's press conference might. If he intimates that the Fed's loose-money policy will definitely end in June and the Fed's balance sheet will shrink, the dollar could rally. If, however, some kind of flow of cheap money will continue being pumped into the system, even if the printing presses stop running, expectations are that it will hurt the dollar and help gold and silver.

Neglia says: "All eyes are on the two-day Fed meeting. If prices remain strong, through, I would be a big buyer."

James Moore, a research analyst at FastMarkets, says, "Given the pace and scale of gains in gold and silver in recent weeks, there is the threat of a deeper correction in the coming sessions, particularly if the FOMC minutes tomorrow indicate the Fed is close to starting monetary tightening."

Investors' love for gold and silver remains strong. The iShares Gold Trust (IAU) fund holds 134 tons, up almost 7% since the beginning of April. The iShares Silver Trust (SLV) added 240 tons of silver Monday as the ETF traded a record 170 million shares.

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Gold mining stocks, a risky but sometimes more profitable way to invest in gold, were falling despite the rally in broader equities.

Newmont Mining (NEM) was down 0.5% at $57.53, and Rangold Resources (GOLD) was losing 0.3% at $85.08.  

Barrick Gold (ABX) fell 6.8% Monday after the company announced its intention to buy Equinox for 8.15 Canadian dollars a share. Investors were wary about the company's diversifying from a pure gold play into a gold/copper company. Shares were shedding another 3.4% Tuesday to $50.08.

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