Crude Oil Collapse 2014 vs Gold Price Crash 2013: Spot The Difference

In this article, analyst and trader Tom McClellan from The McClellan Market Report (www.mcoscillator.com) compares the crude oil crash of this year with prior collapses in oil. It appears that the previous similar collapse took place in 1986, as evidenced by the first chart.  The other large declines did not have a similar pattern of drivers. Think, for instance, of the 2008 crash where crude oil went from $145 down to $37 in just 8 months; that happened as a result of the pricking of a huge commodities bubble.  The decline in 1990-91 was also different as it was triggered by a price top that was way above prior levels.

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.

crude_oil_1975_2014

 

The more interesting finding from Tom McClellan, however, is 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 chart below.

gold_price_vs_crude_oil_2012_2014

From The McClellan Market Report:

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.

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.

gold_price_vs_S&P_2011_2014

 

According to McClellan’s insights, these similarities between these types of price patterns can suddenly stop working, usually at the moment when one is counting on them most to continue working.

The investment lesson here is that investors and traders tend to react in a similar fashion, driven by the same psychological behaviour.  If history is of any guide, then the climax point for the oil price decline is behind us; a robust but failing rebound could get everyone excited about oil again in 2015, although a major disappointment could follow afterwards.

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