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.