In recent weeks, the price of gold has rebounded from the support level of $1160, due to three main factors.
First is the confirmation that China has been buying gold and that it has become easier for people to buy gold. The World Gold Council estimates China produced 313 tons of gold in 2009 but demand is expected to be more than 420 tons.
Second, is the suggestion by the U.S. government that they will move into a second round of quantitative easing. This fear is combined with the developing double-dip in the U.S. economy as shown by the head-and-shoulder reversal pattern in the Dow.
Third is the call by American investment analysts at Goldman Sachs that gold could reach the price of $1,300. This is a conservative estimate, and just a few dollars higher than its recent high of $1,248.20.
CLICK ON GRAPH TO ENLARGE
Gold is built on demand and supply, but its movement is driven by psychological factors. This is seen in the variety of psychologically based patterns in the gold behavior. The first of the these was the parabolic trend that developed between March and December of 2009. This trend shows accelerating excitement which collapses quickly. The 2009 December price retreat was sudden.
This was followed by an inverted head-and-shoulder pattern starting January of this year and ending in March. This pattern captures the increase in bullishness as market trends recover. The chart pattern target of $1,250 was achieved in June. The pullback from this pattern target found support near $1,160 and this is the important technical feature used for understanding the potential future price development.
A peak at $1,250 and support at $1,160 have the potential to define a broad trading band. The upper edge of the band was tested in May and June. The lower edge of the band was tested in January, April and July. The width of the band is projected upwards above the upper edge of the band and provides a longer term price target near $1,340. There is a high probability the new trend will develop consolidation behavior near $1,250 before breaking above this resistance level.