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PRECIOUS-Silver slides from 8-year peak as retail frenzy fizzles out

* CME raises Comex 5000 Silver Futures margins by 17.9%

* U.S. commodities regulator monitoring silver markets activity

* One billion ounces of silver traded in London on Monday -LBMA (Adds context, updates prices)

Feb 2 (Reuters) - Silver fell more than 5% on Tuesday as a GameStop-style buying spree among small investors that took prices to a near eight-year peak appeared to fade following a margin hike by the Chicago Mercantile Exchange.

Spot silver fell 5.3% to $27.44 an ounce by 1320 GMT. On Monday it jumped 7.3% to its highest since February 2013 in the latest leg of a retail-driven buying frenzy in heavily shorted assets such as U.S. video game retailer GameStop .

CME Group raised maintenance margins on silver futures by 17.9% on Monday, a familiar move aimed at reducing unusual market stress, and posts on the WallStreetBets Reddit forum at the centre of the past week’s action argued for traders to steer clear of the metal.

“The CME move is taking some froth off the market,” said StoneX analyst Rhona O’Connell. The correction was inevitable and in technical terms, silver is still overbought, she added.

Investment bank Goldman Sachs said in a note that a silver short squeeze is “unattainable”.

“A co-ordinated surge in investment by retail traders into the silver market would simply raise volatility and generate small regional dislocations in supply-demand dynamics,” the bank said.

The recent retail frenzy has left global dealers scrambling for bars and coins to meet demand, while also pushing the U.S. commodities regulator to monitor the market.

Meanwhile, the largest silver-backed exchange traded fund, the iShares Silver Trust, added about 20 million ounces of silver to its holdings on Monday, following a record inflow of about 34 million ounces on Friday.

Spot gold, meanwhile, fell 1.3% to $1,836.21 per ounce. U.S. gold futures shed 1.1% to $1,844.

Silver may weaken if gold does not move higher, HSBC analyst James Steel said in a note.

The current gold/silver ratio is “well below historical averages, and investors may recognise this level as straying too far from historical norms”.

Platinum declined 2.6% to $1,098.32, while palladium was up 0.2% to $2,249.43.

Reporting by Asha Sistla and Arpan Varghese in Bengaluru; Editing by Jan Harvey and Steve Orlofsky

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