The case against gold ahead of the Fed

Simon Critchley | Ikon Images | Getty Images

It's been a shining month and a half for gold. The yellow metal is up a bit more than 3 percent since the beginning of November, while commodities as a whole (as measured by the Thomson Reuters CRB index) have shed more than 11 percent of value, weighed down by the plunge in energy prices. But that doesn't mean gold is out of the water just yet.

In fact, the commodities research team at TD Securities advises investors to "go short again," in part due to a forecast about the Fed's next move.

On Wednesday, the Federal Reserve will release its latest policy decision. The big question is whether the central bank will keep or nix its famous phrase that it will keep its federal funds rate target ultralow for a "considerable time."

The head of commodities strategy at TD Securities, Bart Melek, wrote that because it could lose the "considerable time" language, the Fed statement "may be the catalyst which sends gold into a free fall toward new cyclical lows."

TD Securities' senior commodity strategist, Mike Dragosits, explained in a phone interview that if the central bank does enact such a change, gold is likely to drop to its next "pivot point" of $1,182.

The thinking behind this is that if the Fed does remove the phrase, it will also remove the hope that the first hike in the fed funds rate won't come until 2016. If the Fed raises short-term rates sooner than some expect, that is expected to hurt gold, given that an increase in short-term rates increases the effective cost of holding non-yield-producing assets like bullion.

Interestingly, iiTrader senior commodities broker Bill Baruch has a very similar downside target to TD Securities, writing in a Monday morning note that "gold above $1,200 is already pricing in that the phrase will remain, and if it is left out, we expect to see a quick test to the next major support level at $1,178.9 to $1,181.4."

A fall to $1,180, which coincides with where gold bottomed in summer of 2013 (it later fell to $1,130 in November of this year) would represent a decline of a bit more than 2 percent from current levels.

However, not everyone is in the bearish camp.

George Gero, a precious metals strategist at RBC Capital Markets, admits that "this has been a major headwind for a while. Anytime the media started talking about rate rises, gold sold off."

Yet Gero believes that the drop in energy prices will actually end up boosting gold prices.

"I think the sharp drop in energy could be a game changer eventually, as lower costs for consumers could be inflationary this year," he wrote to CNBC.