NEW YORK (Reuters) - Gold fell 1.5 percent on Wednesday, its biggest one-day drop in 1-1/2 months, hit by signs that the U.S. Federal Reserve is inching closer to ending its monetary stimulus program and by Cyprus's plan to sell its gold reserves to raise cash.
Panic selling sent gold down to near $1,550 an ounce earlier in the session after European Commission documents showed Cyprus plans to sell 400 million euros worth of gold reserves to finance part of its bailout.
The metal later rebounded off its low as fears of more official-sector sales subsided. Central banks as a group had turned net buyers since 2010 as more emerging economies have added gold to their reserves as a hedge against credit risk.
Gold was also under pressure after minutes from the U.S. Federal Reserve policy meeting in March suggested it was on course to end its extraordinary bond buying stimulus by year-end.
"The loose monetary policy around the world is clearly favoring more on equity investments instead of gold," said Michael Cuggino, portfolio manager of the $15 billion Permanent Portfolio Funds.
Spot gold was down 1.6 percent at $1,559.80 an ounce by 3:29 p.m. (1929 GMT), its biggest one-day decline since February 20.
U.S. Comex gold futures for June delivery settled down $27.90 an ounce at $1,558.80 an ounce.
Trading volume was about 20 percent below its 30-day average, preliminary Reuters data showed.
The March payrolls report, which was released after the FOMC meeting was held, showed weakness in the U.S. labor market, prompting some analysts to express doubts about the probability of the Fed reducing, or ending, its bond-buying program early.
While the S&P 500 rose to a record high on Wednesday and was up 11.4 percent year to date, gold was down 7 percent in the same period.
CYPRUS SELLS GOLD RESERVES
Gold's losses snowballed after news of the Cypriot plan to sell its gold, which marked the biggest euro zone bullion sale in four years.
Although the third Central Bank Gold Agreement (CBGA3) limits how much gold euro zone central banks can sell to meet financing needs, investors are now worried other heavily indebted euro zone members may also start selling.
"The amount mentioned, 10 tonnes, is not large - we've seen that on average come out of exchange-traded funds this year every week," Macquarie metals analyst Matthew Turner said.
"But it's the first euro zone country to have said it will do this for a while," Turner said.
Softer investor confidence in the metal after a fresh outflow from the world's largest gold exchange-traded fund and a second cut in Goldman Sachs' gold-price forecast in less than two months also weighed on prices.
"Funds are starting to think about their gold positions," said David Lee, metal trader at Heraeus Precious Metals Management.
Among other precious metals, silver dropped 1 percent to $27.65 an ounce, after it rallied 2.5 percent on Tuesday for its biggest one-day rise since mid-February.
Palladium was down 0.8 percent at $718, sharply off an earlier three-month low, and platinum dropped 1.4 percent to $1,525.74 an ounce.
(Additional reporting by Clara Denina in London; Editing by William Hardy, Kenneth Barry and Peter Galloway)
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