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 SINGAPORE: Spot silver prices dropped almost 2 percent on Thursday, down 22 percent from a record hit a week ago, after another hike in margin requirements for US silver futures squeezed some of the speculative froth out of the market.

Gold held steady, with traders hesitant to take positions before the European Central Bank's rate decision due later in the day.

The CME Group set successive hikes on COMEX silver futures margins, effective on Thursday and next Monday, which combined with three other increases in the past two weeks has raised the margin requirement by 84 percent, effectively increasing the cost of trading the metal.

Investors are also scrambling out of silver, with holdings in the world's largest silver-backed exchange-traded fund, iShares Silver Trust, down nearly 5 percent on Wednesday, the second sharpest one-day fall since the fund launched in 2006.

The fund's holding peaked at 11,390.6 tonnes on April 25, the same day that COMEX silver futures hit a 31-year high.

"There is liquidation going on in silver after prices rose too much and too fast. Nobody knows where the bottom is, but I don't think there is much room below $35," Ronald Leung, a dealer at Lee Cheong Gold Dealers in Hong Kong, said.

Spot silver fell by 1.7 percent to $38.66 an ounce by 0743 GMT, after dipping to a one-month low of $38.56. It had risen 170 percent in a year to a record $49.51 an ounce on April 28.

COMEX silver also fell to a one-month low at $38.57, and was trading at $38.67, down about 2 percent.

Spot gold , which lagged silver's stellar rally and is now lagging its fall, was steady at $1,516.49 an ounce after three consecutive sessions of declines. Bullion is up 7 percent this year, versus a 25 percent rise for silver.

COMEX gold was almost unchanged at $1,516.70.

"We expect gold prices to remain pretty resilient, but at the moment it is probably a little frothy," said Ben Westmore, commodities economist at the National Australia Bank.

"A lot of rise in gold prices was due to safe-haven investment and weakness in the US dollar."

A more hawkish rhetoric from the ECB and continued weak US economic numbers has kept the euro near a 17-month high versus the dollar, lending some support to precious metals.

Markets will focus on whether the ECB uses the "strong vigilance" code words to signal a rate rise in June, after a hike in April.

Investors are also watching for a key US employment report due on Friday, which is expected to show easing payroll growth in April due to high gasoline prices.

Copyright Reuters, 2011

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