Lumber Gold Ratio

The lumber/gold ratio theory (Michael Gayed) is a great indicator for choosing an either defensive or an aggressive stance in the market.

The trading rules used in the paper are like this (quoted directly from Gayed’s paper):Combining cyclical Lumber with non-cyclical Gold provides vital information on when to “play offense” and when to “play defense” in an investment portfolio.

Using weekly data available on Lumber and Gold going back to November 1986, we developed
the following trading rule:

• If Lumber outperforms Gold over the prior 13 weeks, take a more aggressive stance in the portfolio for the following week.
• If Gold outperforms Lumber over the prior 13 weeks, take a more defensive stance in the portfolio for the following week.
• Re-evaluate weekly and make changes to the portfolio only when leadership between Lumber and Gold changes.
• Research has shown that commodities exhibit momentum in various time frames from 1 month through 12 months, with the strongest momentum exhibited in the 3 month period. Three months equates to 13 weeks, which is the timeframe used in this paper.

When it was “risk on”, Gayed was invested in stocks. When it was “risk off”, he was invested in long-term Treasuries/gold.

The portfolio performance is amazing.

Inverted Yields Curve and Oil

Oil won't do so well. 

But gold will do extremely well.

Global coal consumption

Coal could be bottoming out when the West is done with decommissioning its coal demand. It might take a few years.

Open Interest

How to look at open interest.

For example: this is bullish gold:

Large Speculators (“Smart Money”) hold an informational edge over other traders as far as fundamental supply-and-demand statistics are concerned. “Smart Money” is trend-leading. 

- Commercial Hedgers (“Dumb Money”) 

- Small Traders (“Dumb Money”) 

- Large Speculators (“Smart Money”)

China Gold ETF

Chinese like gold. 

Indians as well.

Palladium hitting new lows

More and more EV's are not good for palladium. 

Gold Equity Valuations

Gold equities used to trade at overvalued levels (P/NAV~2). 

Juniors are even cheaper.

Commodity outlook

Oil producers are going to have a hard time. 

Oil is peaking

McKinsey take on oil.

Silver Forecaster Index

The silver forecaster index is based on the gold forecaster index but adds the CPI component to it.

 

 

The reason why the CPI is added is based on the inverse correlation between the gold:silver ratio Vs. CPI. Higher inflation benefits silver more than gold.

To monitor the CPI, you can use the 10-year breakeven inflation rate, which is updated daily.

 

Additionally, gold tends to outperform silver when the unemployment rate rises.

FOMC: Less Rate Cuts

The recession will be more severe...

IEA Oil Demand

Oil demand is going to flatten. 

Moreover, Citi analysts predict a drop in oil prices, with a forecast of $60 per barrel in 2025. This represents a potential decline of over 20% compared to current market expectations.

China is already cutting oil refining capacity.

Silk road gold demand

2008 crisis initiated China gold buying.

Overconfident Stock Market

Investors are overconfident. 

No copper deficits!

Macquarie says there will be no copper deficits for the next two years. 

Gold Forecaster Index: Rate Cutting Cycle Starts (06-Jun-2024)

 

Gold ETFs start buying gold

Net gold ETF inflows in May and June. 

Unemployment rising

The unemployment rate is about to soar along with gold.

 

Oil futures spreads down

Oil is not looking great. 

Container Shipping Rates Rising

Danaos is going to outperform if container shipping prices rise.