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As Fed looms, is gold’s $1,200 support vulnerable?

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Gold may drop to $1,200 an ounce, possibly breaching the key support level, thanks to a resurgent U.S. dollar and higher Treasury yields on expectations that the U.S. Federal Reserve could signal tighter policy this week, CNBC's latest survey of strategists, analysts and traders shows.

"In the shorter term I believe gold tests $1,200, trades as low as $1,190 or so, after which the bargain-hunters will come in and move the price back to the $1,240 to $1,250 level," said Anthony Grisanti, President of GRZ Energy in a September 15 commentary. "Geopolitical has been quiet and all major economies are easing one way or another. And that makes the Greenback the strongest buck on the block. My bias for gold is lower."

Spot gold staged a modest comeback in Asia on Tuesday, rising back above $1,236 after hitting an eight-month low of $1,225.30 in the previous session. The precious metal has suffered as the dollar climbed, geopolitical risks abated and physical demand from key consumers in Asia slowed.

This could be a brutal week for gold

A stronger U.S. currency makes dollar-denominated assets like gold more expensive for buyers paying in currencies like the euro or the Japanese yen. The dollar is hovering near a 14-month high against a basket of currencies after posting its ninth straight weekly gain on Friday.

"Any indication of the Fed normalizing its monetary policy faster would spur more broad-based USD (U.S. dollar) strength and provide room for gold prices to drop toward our 12-month forecast of $1,050," UBS strategists Giovanni Staunovo and Dominic Schnider, said in emailed comments to CNBC.

CNBC's weekly poll showed 30 percent of respondents (9 out of 30) expect prices to gain this week, nearly two-thirds, or 63 percent (19 out of 30) say prices will fall while 7 percent (2 out of 30) say prices will trade at around current levels.

Read MoreGold ends near7-month low on Fed rate hike fears

The survey's negative view for gold contrasts with data from IG Markets which shows 82 percent of their 501-plus clients with open positions in bullion expecting prices to rise.

Should the Fed disappoint the dollar bulls and keep the reference in the statement that rates will stay near zero for a 'considerable time', then the U.S. currency may partially unwind recent gains, offering a boost for gold.

"I do believe the big risk related to the upcoming FOMC meeting is the monetary group not changing the language to move their bias to raise rates sooner than later," said John Licata, chief investment strategist at Blue Pheonix. "If they don't alter the language, I would expect the USD to give back some recent gains, something that could prompt short-covering in both gold and WTI crude oil."

Investors may book profits on the dollar heading into the Fed meeting, said Rich Ilczyszyn, Senior Commodities Broker at Chicago-based iiTrader. "Look for the dollar to pull back 1 to 2 percent," Ilczyszyn said, adding gold may form "a short-term bottom" around $1,220.

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Gold bulls argue that the Fed will not alter the wording of its closely-watched statement this week to indicate a rate hike may be on the horizon earlier than thought because the U.S. jobs market and the underlying economy remain fragile.

"Jobs are important to (Fed Chair) Janet Yellen, and her decisions are very data-driven," said Scott Carter, CEO of Lear Capital. "The last thing she wants to do is put added pressure on the economy, impede the recovery, and send 'shock and awe' into the streets."

Financial markets may also be under-estimating the risk of an escalation of the conflict in Iraq and the broader Middle East – a scenario which would drive safe-haven flows into gold. "We're entering into a third Iraq War that could have a de-stabilizing effect on the economy and thwart an already anemic recovery," Carter warned.

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