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No Time To Go Counter-Cyclical On Commodities Yet

Commodities | Jul 02 2006

By Chris Shaw

Despite the recent volatility in markets, world-renowned commodity investors Jim Rogers has not changed his view the world remains in a commodities bull market, supported by what he says is a common sense view, in that supply is going down at the same time as demand is going up.

Rogers, interviewed in the latest issue of Credit Suisse’s e-magazine, maintains the current bull market still has a long way to go, estimating a peak won’t be reached until sometime between 2014 and 2022, thanks in large part to the length of time it takes to bring new supply to market to meet the strong demand.

Also supportive in his view is the still relatively low level of interest in commodities globally, as he points out most funds continue to find their way into stocks and bonds and only a very small number of hedge funds are focused on commodity markets. He says the recent surge and subsequent correction in commodity prices suggests the number of hedge fund players in the commodity markets is higher now than was the case a year or so ago.

According to Rogers, one reason why the level of interest of professional investors in commodities remains low is a number of bad investment experiences in the 1980s and 1990s, when the end of the previous commodity cycle meant many investors were badly burned by their commodity investments.

One attraction in his view is commodities are easy to understand, given people on a daily basis have exposure to commodities such as coffee and sugar and oil and therefore can more easily understand the prospects for supply and demand. In contrast, Rogers points to the dotcom boom of a few years ago as a period when investors were happy to buy stocks even though they had little idea of what a company actually did.

Though he suggests the end of the boom remains many years away, Rogers points out the time for investors to become cautious on commodities will be when increases in prices bring about fundamental changes in how people live. Again he uses history as an example, noting after oil prices rose significantly in the 1970s people began changing their habits by buying smaller cars and turning down heaters, only for such action to be reversed when oil prices fell as supply increased.

The other sell signal in his view will be increased coverage from the media, as in his view when commodities begin to be the lead stories in major magazines and newspapers, investors will know it is time to get out of the sector. In other words, he stresses when everyone has the same opinion on commodities it means the top of the market is close, so smart investors should follow a counter-cyclical approach. But not yet, as Rogers believes commodities still have much further to run.

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