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Commodities: Guru-speak! - Views on News from Equitymaster
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Commodities: Guru-speak!
Feb 23, 2006

Commodities guru and co-founder of the Quantum Fund in 1973 with George Soros, which he exited a decade later, Jim Rogers, was in Mumbai recently. As much as being known for his love for commodities, the man is also famous for his journey across the globe in his car, which took him across 116 countries and 245,000 kms in 1,101 days, between 1999-2001. Jim Rogers has also authored three books with the latest being, ‘Hot Commodities’. Here are the key extracts of the speech that he delivered. Jim Rogers expressed confidence in the growth of China and the consequent rise of Asia and its importance in the global scheme of things. Stating the Chinese as being amongst the best capitalists in the world, he expects China to be the lead runner in global growth in the 21st century, similar to that of the UK in the 19th and the US in the 20th century. Apart from the fact that the Chinese save and invest almost 40% of their income (compared to a mere 2% by Americans), they also have strong work ethics. Citing an example of this he stated that while in other countries an employee would probably ask his employer as to how many days of leave would he have, in China an employee is keen to know as to how many days he would be working! He further went in to say that the growth of China would throw up gigantic opportunities for the world. However, while he sees some serious problems in the Chinese real estate market, he believes it will be only a temporary phenomenon.

Jim Rogers was, however, not impressed the way things are being handled by the US. In 1987, the US was a creditor nation and today, it is one of the biggest debtor nations with a debt to the tune of US$ 8 trillion and expanding at the rate of US$ 1 trillion every 15 months. He remains a long-term bear on the US dollar. Considering this, he believes that this is a serious situation as the US$ is the world’s reserve currency and with this currency at risk, it could have serious ramifications for world economies. Further, while refraining from making any comment on the next probable world reserve currency, Jim Rogers did state that he does not see the Euro remaining in existence for long. He, however, likes currencies of Canada, Australia, New Zealand, Brazil, Chile and Peru, all of which are natural resource-based economies and are ‘relatively’ well managed. He expects these economies to do well going forward, thanks to their natural resource reserves.

Commenting on his favourite subject, Jim Rogers expresses significant optimism towards commodities and favoured long-term investing in commodities/raw materials/natural resources. He believes that the bull market is very much on in the commodities market and the downside from here, if any, is limited. Citing a few examples, he said that despite the many fold rise in sugar prices over the last couple of years, these are still at about 80% below their lifetime highs. Similar is the case for coffee, where prices are currently about 70% to 75% off their all-time highs. Moreover, he does not believe that euphoria has set in commodities as there exist a mere 8 to 10 commodity funds globally compared to 70,000+ funds dedicated to stocks and bonds. He further pointed out that if history is any indication of the future, the shortest bull market in commodities in the last several decades lasted for 15 years while the longest was in existence for 23 years. By this standard, the commodities run could continue until 2015 atleast assuming the same started in 2001.

In an effort to justify his stand he pointed out several facts. Over the last several decades, the supply from mines has been on the decline despite the demand being on the rise. Big global commodity players have invested their surplus either in acquiring existing mines to grow or have invested into unrelated businesses like real estate. There has really been no new discovery of mines. The same is the case for oil with new oil reserve discovered since the last 35 years whereas these have been on the decline in countries like Saudi Arabia, Mexico and Alaska. He even raised suspicion on the oil reserves claims by Saudi Arabia of 260 billion barrels, as these have remained stagnant since 1988 to date, despite the fact that the country would have produced over 60 billion barrels of oil since then to date.

He further indicated that UK, which has been one of the largest oil exporters for 25 years, would become a net importer of oil within the next decade. He believes the same holds true for Malaysia. Indonesia has already become an oil importer, as a result of which its OPEC membership ceased to exist, as OPEC is an organisation only for oil exporting nations.

According to him, it is better to invest in commodities directly (through futures) rather than buying companies dealing in commodities. This is on the premise that while a company could go bust and its stock price could go to zero (like ENRON), the price of a commodity could fall but never become zero (for example natural gas in which ENRON traded). Currently, Jim Rogers is bullish on agri-commodities like sugar, coffee, orange juice, maize, soyabean and cotton to name a few. Also, adding to this, he is bullish on tourism stocks in India for the long-term.

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