Gold Price Forecast: $1,200 ahead as the bears make a strong comeback

Gold's recovery rally from August lows has likely ended and prices could fall back below $1,200 in the coming weeks.   

Stepping back, prices hit 3.5-month highs above $1,240 on Oct. 26, triggering speculation that the yellow metal is regaining safe-haven appeal.

In the last two weeks, however, the bulls repeatedly failed to secure an end of the day close above $1,238.58 – 38.2 percent Fibonacci retracement of the April/August drop – leaving the doors wide open for a price pullback, which seems to have gathered pace in the last 24 hours, likely due to hawkish Fed.

The US central bank kept rates unchanged yesterday, but reaffirmed its monetary tightening stance, setting the stage for a 25 basis point rate hike in December. As a result, the treasury yields spiked, pushing the US dollar, gold's biggest nemesis, higher across the board. In particular, the yields at the short end of the curve rose, which are more sensitive to short-term interest rate and inflation expectations, rose to fresh decade highs.

Notably, the policy statement did not show any sensitivity to the recent instability in the financial markets.  So, it seems safe to say that Fed officials are undaunted in pushing ahead with more rate hikes.

According to the latest dot-plot, three more increases are due in 2019. Goldman Sachs sees even more increases next year. More importantly, the Fed is unlikely to back off from its tightening plans unless there is a Lehman-like moment.

Even so, the markets are running behind the Fed, forecasting only two rate hikes in 2019. What it means that a third rate hike for 2019 (possibly even more) are yet to be priced in. Further, USD/CNH has veered from the bearish path and could rise above the major psychological hurdle of 7.00 per US dollar, triggering a broad-based weakness in other currencies.

To sum up, the path of least resistance for the US dollar is on the higher side, and that indeed is a bad news for gold.

The technical charts are also calling the downside in the yellow metal. At press time, gold is changing hands at $21,208 – down close to 2 percent week-on-week.

Daily chart

Gold's repeated failure to beat the 38.2 percent Fib and the drop to $1,208 seen today indicates that the recovery rally from the August low of $1,160 has ended around $1,240 and the bears have likely regained control.

Prices have found acceptance under the key support of the 100-day simple moving average (SMA). The 5-and 10-day SMAs have rolled over in favor of the bears.

The 14-day relative strength index (RSI) has dipped into bearish territory below and is looking south. The moving average convergence divergence (MACD) is flashing a bearish crossover below zero.

Hence, prices could slide further to levels below $1,200. The situation could take a turn for the worse if the bears successfully penetrate the crucial support of $1,196, as seen in the chart below.

Weekly chart

Over on the weekly chart, the yellow metal seems to have carved out a bear flag pattern – a bearish continuation pattern.

A break below the lower edge of the flag would signal a resumption of the sell-off from the April highs above $1,360 and would open the doors for a drop below the yearly low of $1,160.

As of writing, the lower edge of the flag is seen at $1,194 and is seen shifting higher to $1,196 next week.