* Cyprus gold sale would be biggest in euro zone in 4 years
* Other indebted EU members seen unlikely to sell gold
* Central Bank Gold Agreement limits EU gold sales to 400
By Frank Tang and Jan Harvey
NEW YORK/LONDON, April 10 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 ($523
million) to help finance its part of its bailout, an assessment
of Cypriot financing needs prepared by the European Commission
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
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.