Commodities | Apr 25 2006
by Chris Shaw (Tokyo)
For three years at the turn of the millennium famed fund manager, author and financial commentator Jim Rogers (eternally famous as the co-founder of Quantum Fund with George Soros) drove around the world, a journey that gave him a unique perspective of what was happening in different countries and how the changes should shape investment decisions.
Speaking yesterday at the Commodities Investment World Conference in Tokyo, Rogers detailed his current views on the world and the various asset classes, with significance particularly for longer-term investors. Rogers believes there are two factors that should be driving investment decisions currently – the rise of China and the decline of the US dollar, with both set to be long-term trends.
He suggests China will be the world’s next great country, so how to benefit from this should factor into investment decisions. His basic conclusion is to invest in things that China needs, which obviously includes a range of commodities. While this is bullish for the long-term outlook for commodity prices, he also suggests there is a process underway whereby the US dollar is being replaced as the world’s reserve currency.
Such a move means there must be a replacement, but there is really only one contender in his view. Rogers believes it won’t be equities, as on historical valuation measures equities are expensive at current levels and so are likely to range trade at best for the next decade or so.
It won’t be bonds, as US bonds are now in a long-term bear market that could last as long as 15-20 years thanks to the movement away from the US dollar.
The winner is commodities, for the simple reasons of supply and demand. The supply picture is one characterised by a lack of investment in new capacity, particularly in the 1990s when commodity prices were significantly weaker than is currently the case. The lack of money invested in some cases is even more pronounced, Rogers offering as an example the fact the last new lead smelter in the US was built in 1969.
Similarly, he notes there have been no major new discoveries in some commodities for many years, meaning those commodities mined have not been replaced and reserves and resources are continuing to decline. The oil market provides a good example, as he notes Indonesia now imports some oil after having been solely an exporter for many years, with Malaysia soon to be in a similar position.
His view on commodities is nothing new, as the price increases in the past couple of years show. But Rogers suggests the run is far from over, as while gold has rallied strongly in recent months to more than US$600/oz it remains below its all-time record high of closer to US$850/oz.
In inflation-adjusted terms Rogers notes a new high would be around US$2,000/oz. While base metals and precious metals should benefit from the China story, investors may look to other commodities for better gains from here though. Rogers notes agricultural commodities such as sugar and cotton have yet to rally as much as the metals, as while sugar has tripled in price in recent years it remains about 80% below its all-time high.
He also stresses investors should buy commodities directly rather than commodity stocks, as the returns from being invested directly in the metals have proven to generate higher returns over the longer-term.