By Frank Tang and Jan Harvey
NEW YORK/LONDON (Reuters) - Gold posted its biggest one-day drop in nearly 2 months on Wednesday after Cyprus was forced to sell most of its gold reserves, but analysts said strong bullion buying by other central banks should underpin the price of the metal.
Investor fears over more gold sales by other debt-stricken euro zone members such as Portugal and Greece sent spot bullion prices down 1.7 percent on Wednesday, within striking distance of a 10-month low.
Renewed gold interest by emerging economies and gold sales limitations stipulated by Europe's Central Bank Gold Agreement (CBGA) are positive factors that should put a floor under the market, analysts said.
"The bigger concern for the bullion market may be the potential for other distressed euro zone nations to liquidate a portion of their gold reserves," said James Steel, chief precious metals analyst at HSBC.
"We do not believe this will be the case, however, and we expect the official sector to remain standout buyers of bullion," Steel said.
Cyprus, one of euro zone's smallest economies, has to sell excess gold reserves to raise around 400 million euros to help finance its part of its bailout, an assessment of Cypriot financing needs prepared by the European Commission showed.
It was the first major gold disposal by a euro area central bank since France sold 17.4 tonnes in the first half of 2009.
At current prices, 400 million euros' worth of gold amounts to 10.36 tonnes of metal, representing just a small fraction of gold liquidated by gold exchange-traded funds since the beginning of the year, analysts said.
Cyprus' total bullion reserves stood at 13.9 tonnes at end-February, according to data from the World Gold Council.
CENTRAL BANK GOLD AGREEMENT
Macquarie metals analyst Matthew Turner said that it would be very bearish for the gold market if other countries like Spain and Italy with large gold reserves became sellers, but that there are good reasons to believe Cyprus is a special case.
Portugal holds 382.5 tonnes of gold, worth some 14.76 billion euros at current prices, in its reserves, while Spain's holdings stand at 281.6 tonnes, worth 10.8 billion.
Italy is the world's fourth largest gold holder, with 2,451.8 tonnes of gold in its reserves, worth 94.6 billion euros.
The third Central Bank Gold Agreement inked in 2009 states that gold sales by signatories will not exceed a collective ceiling of 400 tonnes per year over a five-year period.
The agreement covers gold sales by the European Central Bank and around 20 European countries that have adopted the euro including Portugal, Greece and Spain.
Despite the Cypriot gold sales, emerging economic powers will remain strong buyers of gold and that should underpin prices in the long term, said Michael Cuggino, portfolio manager of the $16 billion Permanent Portfolio Funds.
Russia, Turkey, South Korea and other smaller but fast-growing economies have been adding gold to their reserves, data by the International Monetary Fund has shown.
Central banks have been keen buyers of gold since the advent of the financial crisis, acquiring a net 532 tonnes of gold last year, a 48-year high, according to metals consultancy GFMS.
As a group, central banks had turned into buyers in 2010, as the 2008 economic crisis highlighted the importance of gold as a hedge against currency and credit risk.
(Additional reporting by Clara Denina in London; Editing by Veronica Brown, William Hardy and Joseph Radford)