With housing on the rebound in the United States, the exchange traded fund for lumber, Guggenheim Lumber (NYSE: CUT) is also rising. Jumping too is the exchange traded fund for oil, United States Oil (NYSE: USO). As the chart below reveals, there is a strong correlation between the two exchange traded funds.
According to one analyst, “Another industry that looks very attractive right now is the timber industry. Any pickup in the housing construction and remodeling activities will result in increased demand for wood. Further, most timber companies deferred their harvest when the demand for wood was low while the assets (trees) continued to grow and so when the housing market returns, the cash flows from harvest operations will increase in a big way.”
The previous lumber price peak was in 2004. That was about a year before housing prices reached the top. As an analyst noted, “Lumber prices tend to do better when economic growth has started to improve but not to the extent that short-term yields are moving higher. There is a pocket of time before long-term interest rates swing higher through until the Fed begins to tighten credit that seems to favor lumber futures.”
That certainly explains the correlation between lumber and oil. Each is a function of economic growth. When the economy is strong, more oil is used and the USO rises. When the economy is expanding, more homes and other buildings are constructed, requiring more wood; which sends the CUT higher. What is noteworthy about the chart is how each both United States Oil and Guggenheim Lumber started declining from May, which is traditionally the strongest period of homes sales.
However, economic growth in the United States is falling while unemployment is rising. Eventually, the fundamentals of basic supply and demand are accounted for in all commodity prices. The recent jump in the price of United States Oil and Guggenheim Lumber can be attributed to speculators anticipating more economic stimulus from central banks, particularly the Federal Reserve. If the Federal Reserve initiates more quantitative easing, commodity prices could rise again due to the weaker dollar as transpired from November 2010 through Jun 2011, the period of Quantitative Easing 2.
As such, expect greater volatility as Bernanke’s August 29 speech at Jackson Hole approaches.
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