EDITOR NOTE: If you know something about technical chart patterns, you’re probably familiar with the ‘cup and handle’ pattern popularized by William O’Neill, founder of Investors Business Daily. The author below sees a major multi-year cup pattern forming from gold’s 2011 highs up to now. What this indicates is significant bullish momentum. Once gold gets a few points shy of $2,000 an ounce, expect a slight dip. Once gold prices pull back, according to this author, use it --the ‘handle’ to the cup--as a last-chance opportunity to buy under $2,000, because after that, gold prices are likely to skyrocket to record highs, and it’ll likely keep going, given the fundamental circumstances surrounding our pandemic- and low-interest-rate driven environment.
The rally in gold futures is closing in on a historic test at 2011's all-time high at $1,912. The relentless advance since March highlights structural instability as a result of dovish central bank policies and loan guarantees that now threaten to drop U.S. interest rates below 0%. That could be catastrophic for Main Street Americans, forcing customers to pay for the luxury of holding cash in banking, brokerage, and savings accounts.
Buying interest in the yellow metal has also been fear driven, with the COVID-19 pandemic increasing worldwide political tensions while threatening to drop first and third world economies into deep recessions. The relentless Nasdaq 100 rally seems out of place in this dangerous equation, especially with credit card companies reporting that consumer activity has stalled once again after a wave of second quarter reopening activity.
It probably isn't wise to expect an immediate gold breakout above $2,000 because all-time highs, especially those posted years ago, mark major resistance levels that can easily repel initial rally attempts. You can see this mechanic play out in the classic cup and handle pattern, in which price action fails a first breakout attempt and eases into a narrow trading range, carving a relatively shallow handle that eventually supports higher prices.
The 50-month exponential moving average (EMA) has lifted above $1,400 on the futures contract, or about 400 points below the current price. This marks the widest divergence between these measurements since 2012, also lowering the odds for an immediate breakout. Watch this relationship closely if gold reverses at resistance because it could identify a support level that offers a low-risk buying opportunity, even if it comes one or two years from now.
Gold Trust Long-Term Chart (2012 – 2020)
The SPDR Gold Trust (GLD) topped out at $185.85 in the third quarter of 2011 and eased into a descending triangle, with support just below $150. It broke down in 2013, initiating a steep downtrend that continued into December 2015, when the fund bottomed out just 23 cents above $100. Higher lows in 2016, 2018, and 2019 marked support through the second half of the decade, while a string of lower highs starting in 2013 carved a descending trendline.
A June 2019 trendline breakout attracted little media attention, making rapid progress that stalled just below the 2013 triangle breakdown in September. Committed buyers returned at the start of 2020, lifting the fund to $159 in February, when the pandemic started to blow up in the United States. Extremely volatile price action then kicked into gear, completing a V-shaped recovery pattern after a 33-point March downdraft.