This Is How The Relationship Between Lumber And Gold Price Will Impact Your Portfolio
London (April 11) Many investors tend to focus on asset-class specific study to gain an edge. They attempt to obtain outperformance based on factors directly related to the asset class being studied. This is an appropriate practice and can provide valuable insight. But in this post, similar to last week's article on the relationship between copper and Latin American equities, we're going to look at the relationship between lumber and gold. Specifically, we're going to follow-up on previous research showing the relationship between lumber and gold contain insights into risk-seeking and risk-averse behavior in stocks. The lumber/gold relationship is not a novel idea. This important connection was brought to the fore by Charlie Bilello and Michael Gayed in their 2015 NAAIM Wagner Award Winning Paper, "Lumber: Worth Its Weight In Gold." Charlie and Michael are extremely smart asset managers with strong thought leadership when it comes to actively managing funds. We can't hold their intellectual jocks, but we can use their research and look into the current state of lumber and gold to find another piece of evidence for managing risk in today's market. In their research, they find:
As lumber outperforms gold, equities tend to exhibit an upward bias and have lower volatility. These are conditions that are conducive towards maintaining higher exposure to risk assets. As gold outperforms lumber, the opposite tends to be true, whereby the inclusion of lower beta assets in a portfolio increases overall return and lowers volatility at the time it is needed most. The relationship between lumber and gold helps to answer the most critical question for active asset managers: when to take more risk ("play offense") and when to take less risk ("play defense") in an investment portfolio - before it's too late.
The relationship between gold and lumber can give us valuable insight into U.S. stock market volatility and risk. As market participants, we can use this relationship to give us an edge. Simply put, their findings highlight when lumber is outperforming gold, it is a risk-on (offensive) characteristic for stocks. In this scenario, investors can be more aggressive with their equity exposure. Oppositely, when gold is outperforming lumber, this is risk-off (defensive) behavior and investors should take a more protective stance. Accordingly, it makes sense for us to dig into how lumber and gold are performing and conclude with a review of their relative strength to each other.
Source: SeekingAlpha
