Silver surged as much as 8 percent on Monday before pulling back sharply when a failure to pierce the all time high from 1980 unleashed a wave of technical selling amid record volume in U.S. futures.

After briefly dipping into negative territory midmorning as speculators sharply took profits near the $50 psychological level, silver later found its footing again. The metal traded largely flat, steadying at just below $47 after the CME Group raised the maintenance margins of silver futures by 9.2 percent.

Gold prices also recoiled from early gains of nearly 1 percent after touching a seventh successive record high with volatility spiking to its highest since November.

The whipsaw in silver prices amid otherwise thin trading market conditions was a stark reminder of the volatile nature of this year's best-performing major commodity, which has gained about 150 percent since the U.S. Federal Reserve signaled new easing measures last August. Silver has risen for nine straight days, matching a record winning streak from 2008.

Silver has transformed itself from an inflation hedge to a speculation tool, said Hakan Kaya, commodities portfolio manager at Neuberger Berman, which manages about $190 billion client assets. At current prices, we find it highly overvalued with no fundamental reasons backing it up.

While often overshadowed by gold, the smaller silver market has handily outpaced the yellow metal's 25 percent gains over the same period. Prices look set to challenge the record $49.48 an ounce from three decades ago when Texan brothers William Hebert and Nelson Bunker Hunt sought to corner the market.

Spot silver was up 1.4 percent at $47.34 an ounce by 3:39 p.m. EDT (1939 GMT), sharply below a session high of $49.31.

Spot gold was at $1,509,60 an ounce, up 0.4 percent, well off an a record high of $1,518.10 set earlier in the session, in tandem with silver's reversal. U.S. June gold futures settled up $5.30 at $1,509.10 an ounce, in a range from $1,502.20 to $1,1519.20.

VOLUME AT RECORD HIGH

U.S. May silver futures jumped as much as over 8 percent to a intraday high of $49.82 an ounce, just about 50 cents off its all-time peak for futures at $50.35 hit on January 18, 1980. May settled up $47.149 an ounce, up $1.09.

U.S. silver volume surged to a record high, topping 300,000 lots, more than doubled gold's turnover, preliminary Reuters data showed.

Despite record futures volume, silver's initial rally was not backed by active trade prior to its sell-off, with markets in Britain, Canada and Australia shut due to the Easter Monday holiday.

Analysts said silver's rally was backed by new source of demand from solar panel manufacturers in addition to traditional strongholds including electronics and photography amid a recovering economy. However, extreme price fluctuations could hurt demand.

We are constantly researching and developing production methods to minimize key resource inputs, including silver, to drive down the costs of production, said Stuart Wenham, chief technology officer of Suntech Power Holdings Co Ltd , the world's top solar panel maker.

Wenham said that the recent rise of silver prices with increasing volatility highlights the importance of the company's R&D initiatives.

OPTION VOLATILITY SPIKES

COMEX option floor trader Dominic Cognata said that volatility in silver options went through the moon ahead of Tuesday's May option expiration and Wednesday's conclusion of the Fed's two-day policy-setting meeting.

Active option trade in iShares Silver Trust , the world's largest silver-backed exchange-traded fund, also suggests some traders maybe betting on a sharp reversal after a huge rally in silver prices.

A key technical indicator, silver's 14-day relative strength index, is warning of a further correction in the silver market after the precious metal got within $1 of its all-time high on Monday and traded at levels not seen in more than 30 years.

On gold, the CBOE gold volatility index <.GVZ>, a gauge of bullion investor anxiety, surged to about 17 percent, its biggest one-day gain since November last year.

James Dailey, portfolio manager of the TEAM Asset Strategy Fund said that silver's technical charts are showing signs of exhaustion, with strong volume recorded at its sharply higher open and the subsequent reversal.

In platinum group metals, platinum was up 0.6 percent at $1,821 an ounce, while palladium eased 0.7 percent at $760.47 an ounce.

(Additional reporting by David Sheppard and Angela Moon in New York, Doris Frankel in Chicago, Rujun Shen in Singapore; Editing by Marguerita Choy)

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