Gold Price Forecast: Three reasons why the yellow metal could drop next week


Gold is currently trading at $1,290 per Oz, representing a 0.33 percent gain on the week.

The safe haven metal has rallied 5 percent in the last four weeks, courtesy of the dovish Fed expectations and the sell-off in the US dollar - gold's biggest nemesis.

Notably, the yellow metal has recovered 61.8 percent of the April-August drop. That is widely considered a sign of bullish reversal. Add to that the rising expectations of a Fed rate hike pause and the yellow metal looks set to extend the rally.

Following three factors, however, could play spoilsport in the next week or two.

Technical failure: The Fed minutes released on Wednesday reaffirmed investors' expectations that the central bank would pause rate hikes. In response, the US dollar took a beating. The EUR/USD pair witnessed a bull breakout above 1.15, while the USD/CNH (offshore yuan) fell to 5.5-month lows. So far, however, the yellow metal has not been able to cross the $1,300 resistance.

The metal's inability to beat that psychological hurdle indicates that the bulls have like run out of steam. Validating that argument is the bearish outside reversal candle of Jan. 4. Further, 5- and 10-day moving averages (MA) are not flat-lined (shed bearish bias). Meanwhile, the relative strength index (RS) has rolled over from the overbought territory and breached the ascending trendline.

And last but not the least, the 50-day MA is closing on the 200-day MA from below. The confirmation of golden crossover (50-day MA crosses 200-day MA from below) is almost always followed by a price pullback. This is because the crossover is a lagging indicator. The 50-day MA takes into account nearly three-month-old data. Meanwhile, the  200-day MA looks back more than 6 months. So, by the time the crossover is confirmed, the markets are overbought and overdue for a correction.

US dollar likely to regain some poise: The sell-off in the USD/CNH pair is overdone, according to the 14-day relative strength index. The dollar, therefore, could witness an oversold bounce/CNH (offshore yuan) could witness correction and that could push up the US dollar higher across the board. (yuan is the global anchor). Also, the very fact that gold is showing signs of exhaustion near $1,300 indicates that a corrective bounce is overdue in the US dollar.

Validating that argument is the bullish seasonality. The dollar index, which tracks the value of the greenback against majors, picks up a bid at the start of the year and remains on the offensive in early March, according to historical data of last 33 years, although over the last 15 years, that bullish bias has weakened.

Oil's recovery is bad news: WTI has rallied by almost 20 percent in the last ten days. Meanwhile, gold has also posted moderate gains during the same time period, which is somewhat surprising since the 90-day correlation coefficient between the two is -0.78 (inversely correlated). The metal, therefore, could come under pressure next week, especially oil finds acceptance above the 50-day MA hurdle of $52.50.

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