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Oil, The Dow, And Gold

04/06/16 01:25:38 PM
by Koos van der Merwe

The weakening price of oil has been causing the Dow to fall. Where does Gold come into the picture?

Security:   DJIA, OIL, GLDL
Position:   Accumulate

The recent fall in the Dow Jones and the S&P and Nasdaq indices, has been the result of a fall in the price of oil. We all know why the oil price has fallen — Saudi Arabia challenging Iran, or is it ISIS, over producing oil in the wells it is controlling to fund the cost of its war? But whatever the reason, the collapse in the oil price has affected the stock indices around the world, and has probably triggered the coming recession. But, where does gold fit into the picture? Is investor money drifting to gold for protection?

Figure 1. Daily chart of the Dow Jones with the oil price.
Graphic provided by: MetaStock.
The chart in Figure 1 is a chart of the Dow Jones with the oil price overlaid. Notice how the oil price topped out on June 20th, 2014 at $107.98 but the Dow only topped out three months later on September 19th at 1726.21. The Dow then fell to a low of 10313.30 by October 15th, 2014 and then started rising, reaching a high of 18285.40 by May 20th, 2015. The oil price continued falling reaching a low of $45.84 by January 28th, 2015, and then rose to $61.36 by May 20th before falling to a low of $35 on August 24th. The Dow fell in tandem, to a low of 15871.35 by August 24th. Oil then started rising, and the Dow rose with it, but whereas the oil price started falling once again on October 8th, the Dow only started falling from November 2nd.

At present, both the Dow and the oil price appear to have bottomed simultaneously on November 19th, and started rising together. The chart does seem to suggest that it is only from March 2015 that the Dow and oil started to move in tandem.

Figure 2. Daily chart of the oil price with London Gold.
Graphic provided by: MetaStock.
The chart in Figure 2 is a chart of the London Gold price with the oil price. Notice how closely the oil price and the gold price tend to move together. However, a look at the chart shows that in many instances the gold price led the oil price in a correction up or down. Most recently, the gold price started to rise from December 16th, with the oil price only starting to rise from February 11th. The question arises — is it the price of gold that influences the price of oil? It sure looks like it.

Figure 3. Daily chart of the London Gold price and the Dow Jones.
Graphic provided by: MetaStock.
The chart in Figure 3 is a chart of the London Gold price and the Dow Jones. Note how the London Gold price appears to be moving up and down ahead of the Dow. Of course, this does seem to suggest that the Dow follows the movement of the London Gold price, or is it simply that investor money, anticipating a fall in the Dow, looks to a safe haven in gold. However, if this were the case, then the Dow would move up or down ahead of the London Gold price.

So, the question remains what is moving what? There is no doubt looking at the charts that the oil producers are buying gold as protection, and they appear to be buying gold ahead of a reduction in the price of oil, which in turn could be affecting the Dow Jones. Why the cheap oil price? In any business, a shrewd businessman will always reduce prices and offer specials to compete with the opposition. Are the oil producers therefore cutting the oil price to hurt the fracking companies? Alberta, in Canada the home of Canadian oil fracking, is in recession. Oil companies are thinking twice about starting new oil drilling in oceans around the world. Then of course there is the present tension in the world, with Brussels, during the past month, stating, "We are at war."

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.

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