Since 2011, gold has established a super bullish cup and handle pattern. This is referred to as super bullish because, over the past years, the consolidation phase of the handle has been confirmed above the 38% retracement level (approximately $1675 per ounce), with the peak now higher than the high at the start of the pattern in 2011.
The duration of the cup extends over nine years, and the handle is just one month shy of three and a half years.
Until now, there have been no concerns regarding the validity of this cup and handle pattern for gold, but it’s hard to say what will happen if the handle pattern consolidation continues for another year or so without an effective breakthrough.
Gold closed December at historical highs on the weekly, monthly, and quarterly charts, but it has yet to realize its upward potential. To gain this upward momentum, it’s necessary for the price of gold to close above $2100.
Alternatively, it might achieve escape velocity only if there is a stock market crash, prompting capital to move from the stock market to the gold market. Gold significantly outperformed the stock market in the gold bull markets of the 1970s and the initial decade of the new millennium. This was the case as well during the cyclical bull market from August 2018 to August 2020, when the price of gold surged by nearly 80%.
Regrettably, gold’s performance relative to the S&P 500 index remains weak; this ratio closed on Wednesday at its second-lowest level in the past 14 months.
Should the stock market crash, reigniting inflation worries, gold might rise to $2300 before a recession or bear market takes hold. However, before a stock market crash and capital inflow into the gold market occur, a breakout from the cup and handle pattern and a powerful surge to $3000 and $4000 for gold prices would be not attainable.
Conversely, the pool of funds currently invested in gold is limited, which also accounts for the lack of necessary momentum for this precious metal to break out decisively.
