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Oil Follows Gold’s Crash Pattern

Chart In Focus
December 24, 2014

With oil prices having been cut in half over the past 6 months, many analysts are forecasting what this means for the economy, for jobs, for consumer spending, etc.  But what I find interesting is the exact nature of the decline itself, and its resemblance to another recent decline in gold prices. 

We have to go back to 1986 to find a similar decline in oil prices.  There admittedly was a huge decline in 2008, from $145 down to $37 in just 8 months, but it came as the result of the pricking of a huge commodities bubble.  There was also a huge decline in 1990-91, when Saddam Hussein spiked oil prices up to $40/barrel after he annexed Kuwait, and then prices crashed back down to $18.  Each of those declines was from a price top that was way above prior levels.

crude oil 1975-97

But in 1986, there was a decline from a horizontal price structure, when the Saudis abandoned OPEC oil quotas.  That decline was much like what we have just seen in 2014, also coming on Saudi action, and out of a flat price structure.  And perhaps more interestingly, in 2013 there was another big decline from a flat structure, but not in oil prices.  That 2013 decline was in gold prices, as shown in the top chart above. 

The magnitude and the urgency of the price declines in gold and oil are similar, which made it reasonable for me to look at their patterns to see if there are other resemblances.  Indeed there are, although the patterns do not really fall into step until around the July 2013 point in oil’s price history. That equates to the January 2012 price bottom for gold prices.  Stating it more simply: Oil is now doing what gold was doing 18 months before.

The correlation has not always existed.  The two patterns seem to have fallen into step together beginning around July 2013.  Before then, the correlation was almost detectable, but not nearly as good as it came to be after that point.  The implication of the current correlation is that if the recent pattern resemblance continues, then we should see a robust bounce in oil prices over the next 3 months.  But while such a bounce would get everyone excited about a supposed new bull market in oil prices, that hope should be illusory. 

As long as we are talking about the resemblance of oil’s late-2014 price slide to that of gold back in early 2013, it is also appropriate to once again make the comparison of gold’s current price pattern to what we saw before in the SP500.  I showed this previously back on June 26, 2013

SPX crash analog for gold crash

Since then, gold has roughly followed the pattern laid down by the SP500, although the correlation has been imperfect.  My sense is that if the Fed had not slathered the market with a whole bunch of quantitative easing (QE) to boost stock prices, we would have seen a better correlation.  Still, the recent bottoming action in gold prices in 2014 matches the bottoming action of the SP500 in 2010, in the months following the May 2010 Flash Crash. 

One important caveat is that these types of price pattern analogs tend to last for a while, and then they suddenly can stop working, usually at the moment when one is counting on them most to continue working. 

So to summarize, the 2008-09 drop in stock prices saw an echo in the 2013 drop in gold prices, which has now had its further echo in 2014 for crude oil prices.  There is a similarity in the way that investors panic out of their holdings in each, and that common physics/psychology shows up as a similar pattern in the price plot.  More importantly for oil traders, we have now likely seen the climax point for the oil price decline, and up next is a robust but failing rebound which should get everyone excited about oil again in 2015, only to disappointment them all over again.

Tom McClellan
Editor, The McClellan Market Report

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