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Much of any economy runs on the principles of supply and demand, often with cyclical changes that become predictable. In the U.S. market, many indicators may give a hint about the state of the economy.
Currently, the S&P 500 has risen 7% in the first quarter, the GDP is moving in the right direction, and the unemployment rate also suggests that all is good. One can expect to get good returns for their investments in the current situation.
However, a Lead-Lag Report piece, by Michael A. Gayed, CFA sees the scenario differently based on one variable; the lumber price. Lumber tells the tale of the housing market, which in turn has a lot to say about the U.S. economy. Typically, whenever lumber prices have fallen, gold prices have risen.
Courtesy: The Lead-Lag Report
The report sees a likely correction of 10% to 15% just around the corner. They expect a tough time ahead for the investors despite all the current good signals.
Experts believe that the pattern indicates that the investors find solace in gold, a relatively low-risk commodity in comparison with lumber. This usually indicates a defensive approach.
The current lumber-to-gold ratio – the price of lumber divided by that of gold – has come down to 0.5 from 0.9 not too long ago. In 2018, a 0.3 ratio led to a nearly 18% dip in the S&P 500. There are, of course, historical events that suggest otherwise.
At the moment, it appears that lumber prices will continue to decline further in the months to come. Whether we are going to see a correction based on the lumber-to-gold ratio remains to be seen.
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