Lumber/Gold Ratio Trading Strategy For Stocks And Bonds (Rules, Backtest, Performance)

In May 2015, Micheal A. Gayed published a paper called Lumber: Worth Its Weight in Gold Offense and Defense in Active Portfolio Management. We used that paper to make a profitable lumber/gold ratio trading strategy for stocks and bonds.

Let’s explain the strategy’s reasoning, trading rules, backtest, performance, and results.

We backtest the following trading rules:

* Make a lumber/gold ratio;

* When the ratio is higher than the month before, we go long S&P 500 (SPY);

* When the ratio is lower than the month earlier, we go long bonds (TLT).

When we coded the trading rules in Amibroker, we got the following equity curve shown below.

The results are good, but the bond market collapse in 2022/23 made the earlier drawdowns small: 35% drawdown!

We also shared the rules made by Micheal Gayed and explain how it performs when we switch TLT with gold here >>

https://www.quantifiedstrategies.com/lumber-gold-ratio-trading-strategy-for-stocks-and-bonds/