The Gold to Lumber Ratio

The price of lumber has gone up a lot lately. There's much talk about this in certain circles. Some see it as an omen of imminent hyperinflation. Others are less pessimistic, siting transitory supply chain disruptions as a possible cause. However, there's nothing stopping us from looking at a price chart ourselves to see if we can figure out what's going on.

As noted in my book on investing, long term charts should be denominated in gold, and not some fiat currency like the dollar. That's because fiat is flexible and constantly debased. The only reliable measure over long time spans is gold. Let us therefore take a look at the gold to lumber ratio.

This chart goes back to the mid 1970s, and should be read as follows:

• Peaks indicate gold strength relative to lumber
• Troughs indicate lumber strength relative to gold

Starting with recent history, we see gold strength going into year 2020, followed by a rapid reversal. This corresponds to the reversal in monetary policy by the FED that happened with the plague as an excuse. Massive amount of new dollars have been created in this time span, and it appears that lumber reacted more strongly to this deluge of dollars than did gold.

The beginning of the chart include the high inflation era of the 1970s. This started with lumber strength, but ended with gold strength relative to the dollar, and a corresponding strength relative to lumber. The money deluge back then had the same initial effect as what we've seen this past year. It remains to be seen if it also ends the same way.

What followed after 1980 was a long, orderly decline in the strength of gold relative to lumber, with a bottom in 1999, corresponding to the bottom for gold relative to the dollar.

Fair price for lumber looks to be in the 1.5 to 3.0 range, which means that lumber traded at fair price from 1982 to 1992, but traded above fair price from 1992 to 2005. There was more than a decade of easy profits in the lumber industry. But that changed quickly. After three years in the fair price range, lumber traded below fair price from 2008 to 2018.

From 2018 until today, there have been some wild price fluctuations that have brought us to the current high price for lumber at about 1.1.

The chart looks choppy at the tops and smooth at the bottoms, but this is because the chart is linear, rather than logarithmic. The tops are not more volatile than the bottoms, they merely look this way due to the way the data is presented. There's no information hidden in these details.

What we see is the cyclical nature of the lumber trade. Good years are followed by bad years. With a decade of bad years behind us, it's now reasonable to expect lumber to stay relatively expensive for up to a decade going forward. However, most of the potential for speculative profits are taken out at this point. All time high for lumber relative to gold was at 0.69 back in 1999, and lumber traded on average at about 1.0 during the golden years from 1992 to 2005. That's a mere 10% above current levels. Furthermore, there's the spectre of inflation, so gold, rather than lumber, is the better bet going forward.

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By Swtpc6800 en:User:Swtpc6800 Michael Holley - Own work, Public Domain, Link