Jim Rogers and his Hot Commodities

To use a Charlie Munger analogy, Jim Rogers reminds me of “a man with a hammer”. To a man with a hammer, every problem looks like a nail. Jim has a hammer (his own commodities index) and every commodity looks to him like a nail.

Jim Rogers founded the Quantum Fund (an early hedge fund) with George Soros in the early 1970s. The Quantum Fund increased in value by approximately 4,200% during the 1970s.

The reader should note that the only way one can get a 4,200% appreciation in anything over such a short period of time is by using significant leverage and then making some very good calls. Leverage is never mentioned when the returns of the Quantum Fund are recited.

As a prelude to the article below have a look at the following two charts. The first chart shows the compound return per annum of oil, gold and the S&P 500 (excluding dividends) as well as showing the US inflation rate (CPI) in each decade from the 1950s to 2008.

The second chart shows the cumulative value of $1,000 invested at the beginning of 1950 in oil, gold and the S&P 500 (excluding dividends). Also shown is the cumulative increase in $1,000 needed to keep pace with US inflation (CPI). The value of that $1,000 is at the end of each decade (31 December 2008 for the current decade).

I won’t comment on the charts, they speak for themselves (particularly the second chart).

Some quotes from Jim Rogers (in italics) and my comments below:

I think agricultural commodities are probably going to do better than others for the moment because many agricultural prices are still very, very low on a historical basis. Sugar is still 80% below its all time high, just to give you an idea. Cotton is 60% below its all time historical high. You know, there are not many things that are 80% below where they were 35 years ago. Sugar futures are one of them.

Why are sugar futures 80% below where they were 35 years ago? Simple answer: There is plenty of sugar being produced. Absent supply disruptions (due to weather events or diversion to ethanol production), there is no logical reason why sugar futures will rally to historic highs. The fact that sugar futures are 80% below their high of 35 years ago clearly demonstrates what a poor investment sugar has been over time.

Always in the past, when people have printed huge amounts of money or spent money they didn't have, it has led to higher inflation and higher prices. In my view, that's certainly going to happen again this time. Oil prices are down at the moment, but that's temporary. And you're going to see higher prices, especially of commodities, because the fundamentals of commodities are enhanced by what's happening.

If the fundamentals of commodities are enhanced by what's happening, why have they all fallen by similar (or greater) percentages to that of the world’s stock markets? (I’m excluding some precious metals). Answer: Because you simply cannot have a global recession and at the same time have significant demand for commodities. That makes sense doesn’t it? Sure, people start to view precious metals as a safe haven during a crisis, but they’re sure not viewing zinc or nickel as a safe haven are they? Demand for base metals is dependent on the health of the economy and the global economy has a bad case of the flu.

Agriculture is the best place – one of the few places - where I would put money in the investment markets right now. I’d buy agriculture. I’d buy the renminbi, the Swiss franc, the Japanese yen, but beyond that, there’s not much I see that I would be buying.

Everybody should become a farmer. Farming is going to be one of the greatest industries of our time for the next 20 to 30 years. It's going to be the 29-year-old farmers who have the Lamborghinis.

I’ve always said that anything that relies totally upon weather conditions and keeping diseases and insects at bay is risky (just ask a farmer if you want proof). Agriculture is extremely important but lots of people have suffered enormously trying to make a decent living out of it. If agriculture is such a wealth creator, why do so many farmers periodically need assistance from the government to make ends meet?

I still own my US dollars. I plan to get out of the US dollar some time this year. It seems that the short covering rally, it is an artificial rally, people are forced to cover their shorts in the US dollar and there were huge short positions.

The United States is in serious trouble, the people in Washington do not have a clue of what is going on. In two years this has been brewing and for two years they have been making mistakes. So the US is going to have its worst economic time since the 1930`s.

It's pretty embarrassing for President Obama, who doesn't seem to have a clue what's going on—which would make sense from his background.

All the US had to do was put Jim in charge – he would have fixed everything! He managed a hedge fund so he could manage the whole US economy!

Jim has actually written the US off. It’s all about China for him. Jim: Don’t write the US off just yet. Most of the technological innovations of the 20^th century came out of the US – there is no reason why that will not continue. Japan, South Korea and China are good at taking US technology/products and improving upon them as well as producing them very efficiently. But remember, someone had to invent those products to begin with and those people were Americans. It’s technological progress that creates enormous wealth – far greater wealth than cultivating corn or sugar.

And finally, Jim also thinks that anyone can profitably invest in commodities (the words are emblazoned on the front cover of his book Hot Commodities). I say nonsense.

If you have Jim’s timing skills (Jim says he isn’t a timer, but he is) you could make a fortune in anything, but saying that the average person in the street can become a successful commodities investor is just not true.

Regardless of what Jim says, trading commodities futures is very risky. The average person who wants to try their hand at trading commodities will be competing against people who do it for a living. Suffice to say, these professionals are far more skilled at it than some “average Joe” reading one of Jim’s books.

However, I will agree with Jim that index investing is the sensible way to go if you really do want to get involved with commodities (or anything else for that matter).