The relationship between timber and gold
The relationship between timber and gold is not a new idea. This important connection was highlighted by Charlie Bilello and Michael Gayed in their 2015 NAAIM Wagner Award Winner Paper, “Lumber: Worth Its Weight In Gold.” Charlie and Michael are extremely smart asset managers with strong leadership in actively managing funds. In their research they find that:
When timber performs better than gold, stocks tend to exhibit an upward bias and have lower volatility. These are conditions that contribute to maintaining a higher exposure to risk assets.
When gold outperforms timber, the opposite tends to be true, with the inclusion of lower beta assets in a portfolio increasing overall returns and reducing volatility at the time it is most needed. The ratio of timber to 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 is too late.
The relationship between gold and timber can provide valuable insights into stock market volatility and risk. Simply put, their findings highlight when timber outperforms gold, it is a risk-on (offensive) characteristic of stocks. In this scenario, investors can be more aggressive with their equity exposure. Conversely, when gold outperforms timber, this is risk-off (defensive) behavior and investors should take a more protective stance.
Their research thus suggests that the price of timber is a recession indicator, just like the base metal copper, sometimes called Dr. Copper for its ability to measure the temperature of the business cycle.
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