Silver, gold rebound after sell-off; dollar caps gains

Spot silver rebounded as much as 2.3% and gold edged up on Thursday after losses in the previous session, supported by light buying in Asia, while a firm dollar weighed on market sentiment.

The commodities market took a hit on Wednesday from weak Chinese industrial output data, improving global grain supplies and rising US gasoline stocks.

Also see: Wall Street slips 1% after sell-off in commodities

Light buying was spotted in the physical gold and silver markets, but activities slowed down from Wednesday after market participants were caught off guard by the sell-off, led by a drop of 9% in silver. "People are still worried about commodities -- we have seen some short-covering, some buying on dips today, but the buying is not substantial," said Dick Poon, manager of precious metals at Heraeus in Hong Kong.

China's April industrial output was significantly weaker than forecast, suggesting the world's second-largest economy was cooling, reducing the need for further aggressive monetary policy tightening even as inflation remains high.

"If inflation had been much higher, it would have meant more buying in gold and silver," said a Tokyo-based trader. "Since the economy is slowing and inflation seems under control, it is relatively bearish for precious metals."

Spot silver rose as much as 2.3% to USD 35.88 an ounce, and eased to USD 35.43 by 0340 GMT. US silver futures edged down 0.2% to USD 35.46. Bearish technicals contributed to the sharp fall in silver, the trader added. "It was a perfect textbook scenario -- when silver failed to break above USD 39.4, the 61.8% Fibonacci retracement level from the high last week, it collapsed," he said.

The gold-silver ratio, used to measure how many ounces of silver is needed to buy an ounce of gold, jumped nearly 9% on Wednesday to its highest level since late February, at 42.78.

Silver is likely to consolidate around the USD 35 level, after a rapid rally pushed it to record high near USD 50 last week and a dramatic sell-off knocked prices down more than 25% last week. Silver remained the best performer of the precious metals complex, up 15% so far this year, compared to gold's 6% gain.

Spot gold edged up 0.4% to USD 1,505.19, also rebounding from the losses in the previous session. US gold futures gained 0.3 to USD 1,505.10.

The USD 1,490 level was seen to offer strong support to gold, traders said. "We may see gold prices retrace a bit, as the factors that had supported gold's recent rally are fading," said Hou Xinqiang, an analyst at Jinrui Futures in China. These factors include the unrest in the Middle East and North Africa, high oil prices and dollar weakness, he said.

The dollar index, a measure of the greenback's strength against a basket of currencies, held steady after hitting a three-week high on Wednesday, as fears over Greece's debt crisis weighed on the euro.