Gavekal Capital: Gold And Lumber Glidepaths In Taper Scenario

Wednesday, June 4, 2014

Gold And Lumber Glidepaths In Taper Scenario

Not all commodities are driven by the same factors.  Weather patterns exert a heavily influence when it comes to crop prices (corn, soy, etc.) and in turn meat prices (beef, pork, etc.).  Global demand for durable goods, infrastructure building, etc. drive metals like copper or iron ore.

When it comes to gold and lumber the driver of prices recently has been monetary policy, specifically quantitative easing (QE).  More QE stimulates building, which in turn boosts lumber prices.  Less QE has the opposite effect.  Gold is surely more complicated given its role as an alternative store of value and medium of exchange, but monetary policy is likely the most important variable here too.

What's interesting is how QE has had the exact opposite effect on lumber and gold.  In the charts below, we plot the three month change in Fed total assets alongside each commodity.  The three month rate of change in total Fed assets peaked at $332 billion on 12/13/13 and currently sits at roughly $166 billion, a drop of almost half from peak to present.  In the first chart, we invert the right scale to show how gold should RISE as the taper unfolds.  In the second chart, the right scale is upright to show how lumber should FALL as the taper unfolds.