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Jim Rogers on the Commodities Market

Investment U E-Letter: Issue # 541
Monday, June 5, 2006

Exclusive Investment U Interview (Part 1): Jim Rogers Predicts Another Raging Bull Market in Commodities
by Mark Skousen, Chairman, Investment U

One of the most fascinating “adventure capitalists” I’ve met is Jim Rogers.  He’s a free spirit, having managed money with George Soros, taught at Columbia University, written several financial books, traveled around the world by motorcycle (and later a BMW), and now settling down at the age of 60 to have a family… I’ve known Jim for years, and he’s a great friend.  My wife Jo Ann and I spent an hour with him at his magnificent mansion in Manhattan (built in 1899), and his answers to my tough questions did not disappoint.
~ Enjoy!  AEIOU, Mark

Mark Skousen:  You’ve written a book called Hot Commodities: How Anyone Can Invest Profitably In the World’s Best Market. Given that commodities have gone through a major correction of late, are they going to make a comeback? Is this the top of a commodities market, or just a correction?

Jim Rogers:  First, we’re in a secular bull market in commodities, which started early in 1999… I went back and looked, and the shortest bull market in commodities I could find lasted 15 years, and the longest lasted 23 years. So, if history is any guide, this bull market will last sometime until 2014 and 2022. That’s not a prediction; I’m just telling you what history would indicate. Yes, some commodities are up, but if you look at the commodities market, there are only five or six commodities that have made all-time highs. And they’re not even – most of them – above the old all-time highs. Zinc is, copper is, and oil is, but the rest of them, even aluminum, which got near its all-time high, or lead, or tin… they’re not far above their old all-time highs, for the most part.

Mark Skousen:  Gold and silver… they haven’t hit their all-time highs.

Jim Rogers:  Silver is 75% below its all-time high… gold is 30% below its all-time high. Sugar is 80% below its all-time high. Corn is 50% below its all-time high. Cotton is 60% below its all-time high. I could go on and on… and those aren’t adjusted for inflation. So, most commodities now are somewhere between 80% and 90% below their all-time high, especially adjusted for inflation.

So is this over? No. Copper and zinc may slow down for a while. We haven’t even really gotten started. Commodities have… my index has tripled… more than tripled.

Mark Skousen:  So easy money has been made, in your opinion?

Jim Rogers:  In zinc and copper. But not in coffee. Coffee is 75% below its all-time high. I don’t want to use the term “easy money,” but there’s still plenty of money to be made. Because in bull markets – in every asset class – eventually everything makes a new all-time high.

You buy land in Los Angeles, and if there’s a real estate boom, everything goes to an all-time high, eventually. Even the slums. And usually they go well above the old all-time highs, so we have a long, long, long way to go. There are always corrections. In 1987, stocks went down 40% in five months. Stocks went down in 1994, they went down in 1990, they went down in 1989… we had some big corrections.

But the smart people bought more… they didn’t panic and sell out. In the 1970s, gold at one time, during a two-year period, went down 50%, and a lot of people panicked and gave up, because it was a big two-year draw-down. Well, gold did a turnaround, and went up 850%. Between 1974 and 1976, gold went from $200 to $100, and then it went to $875. This is the way markets work, and if people don’t understand this about markets, you probably shouldn’t be investing in the first place.

Mark Skousen: But aren’t commodities more ideal for a speculator, rather than a long-term investor? Does buy-and-hold really make sense?

Jim Rogers:  Yale University recently did a study, and the Wharton School at the University of Pennsylvania determined that in the past 45 years, you’d have made more money in commodities than in stocks, with less volatility and a better inflation hedge.

Mark Skousen:  That’s a broad-based index... that’s not true of gold. 

Jim Rogers:  Your question was about commodities, not gold, but we can go back to gold if you want to. Commodities have been better investments. And the study also showed that you would have made 300% more investing in commodities themselves, rather than in commodities stocks.

If you want to buy a stock, you have to invest in the right company, you’ve got to worry about management, balance sheets, environmentalist unions, politicians, and 100 other things… But when you invest in commodities, there’s too much that’s going to go up, and too little that’s going to go down, and vice-versa.

Natural gas does not know who the Fed chairman is, and it doesn’t give a darn who he is.  If you invest in natural gas stocks, you have to worry about a lot of stuff. Natural gas has tripled in the last five to six years. Enron was a natural gas company. Enron went to zero. Natural gas can go down, but it can’t go to zero.

Your odds are a lot more risky… a lot riskier than commodities, because sure, they’ll fluctuate and go down, but they can’t go to zero.

Mark Skousen:  But you can’t just blindly buy commodities because you say there’s going to be a 15-year cycle. No one knows how long this cycle is going to be. And so you have to look at the fundamentals – and what are the fundamental economic reasons for this, and are those still in place?  What are the things that you look at?

Jim Rogers:  The main reason we’ve always had bull markets in commodities is supply and demand. In the ’80s and ’90s, we had a bull market in stocks, but nobody called you up and said ‘let’s invest in a sugar plantation’ or ‘let’s invest in a lead mine.’ There was a bear market in commodities so no one invested in productive capacity. 

All the great oil fields in the world were discovered more than 35 years ago. There’s been no major oil discovery anywhere in the world since 1970. Alaska’s in decline… The Mexican fields are in decline… The North Sea is in decline... The U.K. has been exporting oil for 25 years – but within the decade, they will be importing oil. Malaysia has been exporting oil for decades – they will soon be importing oil. Indonesia’s a member of OPEC, and about to get thrown out because they now import oil…

You know, oil fields deplete. Ten years ago, China exported oil. Now they’re the largest importer of oil in the world… the second-largest consumer of oil in the world.

Mark Skousen:  Speaking of oil… We haven’t built any refineries in this country since 1976. I can understand why that would keep gasoline prices up. But couldn’t you develop a glut outside the United States.  Couldn’t oil prices drop like natural gas did recently?

Jim Rogers:  I’m glad you understand that – I read in the press that there are no refineries and that’s why oil is going up, and that’s wrong. The fact that there are no refineries would keep oil down. But be that as it may, we’ve got to have the energy somewhere in the world… In China, they are building refineries. In Asia, they’re building refineries as fast as they can. 

Mark Skousen:  Now, one of the criticisms of your book was that you only recommended the commodities themselves, rather than the stocks. Have you changed your mind?  Do you like the ETFs or do you like the real asset funds that are out there, like the Oppenheimer Real Asset Fund… These are ways of buying commodities through the stock market. 

Jim Rogers:  I remember in the 1970s when oil went up 10 times. A lot of oil companies did not go up. If you don’t have reserves, or if you have a bad balance sheet, or 100 other things, just because you’re an oil stock does not mean you will go up in the ’70s. And the Yale and the Wharton studies show you would have made 300% more investing in commodities themselves, rather than in commodities stocks.

Mark Skousen:  You would think of gold stocks as being the leveraged way to buy gold. Maybe that’s an exception to your rule.

Jim Rogers:  Well, more money has been lost in gold mining stocks than in any other industry – including railroad stocks…

Mark Skousen:  Well, if you stick with the blue chips that are actually producing them, you triple your money. If you want to leverage your return, you buy the gold stocks rather than the gold itself.  Do you go along with that?

Jim Rogers:  Well, yes. If you buy the right natural gas company (I’m going to use natural gas instead of gold for a moment), if you find a natural gas company that’s going to discover gas in Berlin, fine, because you’re going to make a gigantic amount of money. But there are 500 natural gas companies in the world, and chances of your getting the right ones are not very high. 

Even with gold, the chances you’d get the right gold company are not very high.

Mark Skousen:  Uranium just hit its all-time high. Are you bullish on uranium at this point? 

Jim Rogers:  I certainly am. There’s no futures market in uranium, so there’s no way to participate except through stocks. You could buy uranium stocks and put it in your vault if you want to. I’m not going to put uranium in my cellar, but yes, I’m very bullish on uranium. China’s building 25 nuclear power plants, and that’s just the beginning.

Even in America we’re starting to talk about having nuclear power.

Mark Skousen:  Tony Blair changed his mind on that. And the anti-nukes… even they’re reversing their views. It’s interesting…

Jim Rogers:  But also, they’re coming to the view that if you can control nuclear power – whatever that means – it is cleaner than coal. It is cleaner than oil. It’s cleaner than a lot of things…

Mark Skousen:  Jim, you were a money manager for many years. Do you manage money now?

Jim Rogers:  Only my own. Well, I have these index funds, but nobody manages an index fund, as you know. But the basic point, Mark, is that if you find the right company, yes, it’s a good investment. But otherwise, you’re better off buying gold. You’re better off buying natural gas. You’re better of buying wheat…

Editor's Note: In part two of my interview with Jim, you’ll see which emerging market equities he’s sold recently, and the one he’s still buying. Also, you’ll find out why he thinks the Fed is coming to an end, stating, “It’s going to fail.”  Stay tuned…

Good investing,

Mark