Gold Price Forecast: Bulls eye a 50% mean reversion

• Gold is consolidating at a key support structure as the US dollar and yields press on. 
• Bulls have their eyes on corrections and for a continuation in gold higher to test 50% of the drop. 

Gold is flat and consolidating near $1,730/oz in a 38.2% Fibo correction of the recent drop from the $18,00s to the 1,677s and the lowest level since March.

 The precious metals have been pressured by a heavily bid US dollar which recently touched its highest level in more than four months against its main rival, the euro as investors speculated further over Federal Reserve's next move. 

The US dollar index DXY, which measures the greenback against a basket of currencies, was up for a third straight session, to the highest level in about three weeks at 93.139, tracking higher highs in long-end US Treasury yields. 

The 10-year yield scored a fresh recovery high on Tuesday of 1.3490%, up from 1.1270%, weekly lows posted on 4 Aug which could turn out to be the 2021 cycle lows, (see below). 

The U dollar has been tinkering with a breakout for several weeks on the prospects of the Federal reserve needing to battle higher than anticipated inflation risks by tapering its bond purchasing programme this year.

However, markets have been patiently waiting for a shift in rhetoric and further clarity from the Fed officials that had otherwise been defending their position in the inflation risks were transitory. 

Instead, there had been more of a focus on economic data and especially the jobs market. 

At the last Federal Reserve's interest rate meeting, the Fed's chairman, Jerome Powell, was explicitly clear that the Fed's main concern was the jobs market. 

Powell was saying that he was more concerned about the more than 6 million Americans who were still out of work because of the pandemic.

Therefore, currency investors have been on the lookout for job gains to accelerate before second-guessing the Fed's next move which had held the US dollar back and gold prices balanced at the edge of the $1,800 cliff. 

But as Friday’s strong jobs report showed, with 943,000 new jobs created in July and above the 870,000 expected, the Fed can no longer hide behind the jobs market.

Following a series of hawkish statements from Fed officials and combined with the jobs data, we saw the markets react in kind in buying the greenback:

Consequently, the moves have shaken the bulls out of the gold market, at least from a short term speculative basis. 

''The set-up was asymmetric, and ultimately the strong jobs number catalyzed substantial liquidations in gold as the yellow metal broke below its bull-market defining trendline from 2019,'' analysts at TD Securities said. 

On Monday, the moves in the greenback were underpinned by the most recent hawkish of comments from Fed officials.

This time around, following Fed Vice Chair Richard Clarida's warning last week that he does see upside risks to inflation, Atlanta Federal Reserve Bank President Raphael Bostic spoke and the Fed could start slowing its bond purchases nearing quickly. 

This has lowered the bar for an official taper timing announcement from the Federal Reserve at the annual Jackson Hole conference of central bankers later this month, 26-28 Aug. 

However, investors will be looking to this week's key event in the 

US consumer price data is due on Wednesday for further clues on how close the Fed are to not only tapering but to hiking interest rates. 

Hawkishly, Clarida said last week the central bank is likely to hit its economic targets by the end of next year and start raising rates again in 2023. 

Clarida noted that inflation is tracking to meet and exceed the Fed’s 2% goal.

“Given this outlook and so long as inflation expectations remain well-anchored at the 2% longer-run goal … commencing policy normalization in 2023 would, under these conditions, be entirely consistent with our new flexible average inflation targeting framework,” the policymaker told the Peterson Institute for International Economics in a virtual appearance.

On the other hand, Wednesday's CPI event could pop the bubble if it disappoints. The market consensus stands at 5.3% YoY.

However, ''another strong print is unlikely to sway core FOMC voters that the current phase of intense inflation pressures is anything other than transitory,'' analysts at ANZ Bank argued. 

''Following the July FOMC meeting Chair Powell said the Fed wouldn’t hesitate to use its policy tools if inflation pressures prove to be more than just transitory. However, he thinks this is unlikely to happen until maximum employment is reached, and this goal remains some way off.''

Gold technical analysis

''CTA trend followers are likely to continue growing their shorts in coming sessions, adding further selling pressure as the market looks for a bid,'' analysts at TD Securities argued. 

Combined with the prospects of there being a cycle low in the 10-year yield as indicated with a double bottom on the daily chart as follows:

... then the outlook for gold is indeed bearish below 1,724:

With that being said, there is a probability that the price will continue to correct, potentially to prior support and the 50% mean revision mark, prior to moving lower: