Silver slumps to 4-year low; gold looks likely to test $1,200

By A. Ananthalakshmi

SINGAPORE (Reuters) – Silver's sell-off extended to a second session on Monday, with the metal tumbling to a four-year low, as investors unwound long positions amid strength in the dollar and the possibility of a sooner-than-expected U.S. rate hike.

Weakness in gold, which fell to its lowest since January and was edging close to breaking below $1,200 an ounce, also weighed on silver and other precious metals.

The precious metals group has seen sharp losses in recent days as the dollar index hit a 4-year high last week on expectations the world's biggest economy will see the start of its rate-tightening cycle sooner-than-expected.

"It is hard to get too excited about the precious metals group at this stage, as poor and uninspiring technicals will likely continue to exert pressure on prices," INTL FCStone analyst Edward Meir said in a note.

Spot silver slid to $17.30 an ounce – its lowest since June 2010, while spot gold dipped to $1,208.36 – its lowest since early January – before recovering modestly to trade at $1,213.10 by 0302 GMT.

Platinum hit fresh nine-month lows of $1,322.30 on Monday. Palladium also slipped and is down about $100 since hitting a 13-1/2-year high on Sept. 1.

"It looks like we can see further long liquidation for silver," said one precious metals trader in Sydney. "The next key support at $16.60. And if we do trade under $17, there will be significant stop-loss orders around that level."

Data from the Commodity Futures Trading Commission on Friday also showed that hedge funds and money managers switched silver into a net short position for the first time since mid-June.

"Gold is also vulnerable to the downside," the trader said. "Immediate support is at $1,200, also a key psychological level, then $1,180."

Gold's recent losses have erased almost all of its 2014 gains, with the metal now up only 0.7 percent from last year, when it lost 28 percent of its value.

Gold has been under pressure recently as speculation has mounted that the U.S. Federal Reserve will increase interest rates sooner than expected on a strong economy.

Any increase in rates would dim the appeal of non-interest-bearing assets such as bullion.

Investor interest has dipped as seen in recent flows of SPDR Gold Trust, the world's largest gold-backed exchange-traded fund. The ETF's holdings fell 7.78 tonnes to 776.44 tonnes on Friday – its lowest since December 2008.