Jim Rogers, investment legend, talks to MoneyWeek about investing in commodities, the price of oil, the new Federal Reserve chairman – and the value of orange juice as a safe haven investment.
Harry Stourton: Let’s start with oil. You’ve been bullish on the price for some time, but now it has fallen from its peaks, what do you think will happen next?
Jim Rogers: Oil has fallen from $70 a barrel to $55. And I think it will go lower – it’s normal to have a correction in any kind of market. But this is a short-term thing. My view is that the next surprise is going to be how high the price of oil stays and how high it goes ultimately. There have been no big oil discoveries in the last 35 years and all the major oil fields are in decline. The UK has been one of the world’s great exporters for 25 years, but it is going to be importing oil within the decade. Malaysia will be importing oil within the decade; Indonesia is now importing oil and has been thrown out of Opec as a result. Mexican production is in decline; the oil fields in Alaska are in decline. Unless somebody finds a lot of accessible oil and finds it soon the price of oil is going to go much, much higher.
HS: What about Saudi? Doesn’t it have the capacity to increase production?
JR: In 1979, the last time Aramco (the Saudi state oil company) had its reserves independently audited, there were 245 billion barrels in reserve. We then didn’t hear from Saudi Arabia for a decade and in 1988 it announced it had 260 billion barrels of oil. Now, Saudi Arabia announces every time that it has 260 billion barrels of oil. It’s the goddamndest thing you ever saw – they’ve produced 63 million barrels of oil in the last 17 years, but their reserves never go up, never go down! Yet all the other fields in the world are in decline. I’m not a geologist, but I know something’s wrong.
HS: So oil companies should really be spending more on exploration?
JR: Yes. Exploring is expensive and they haven’t been doing enough of it because their budgets put the oil price at $28. Well, maybe oil is going to go to $28, but if it goes to $28, buy all that you can cause it ain’t gonna stay there very long! They should be raising their forecasts and hence the amount they spend on finding new oil. Instead, they’ve been spending money buying up other oil companies to increase their reserves, but that does not increase the world’s reserves. It’s great for the CEOs, but it doesn’t do much for the supply of oil in the world.
HS: Do you invest in oil exploration firms?
JR: Not really. Studies show that you make more money investing in commodities themselves than in the shares of companies that produce them. I own Woodside Petroleum, and in the commodities sector as a whole BHP and Rio Tinto, but I’ve owned these for a long time. I wouldn’t buy them now.
HS: What about refining companies?
JR: I don’t own any, but some of the refining firms are making a fortune. There have been no new refineries built in the US for 30 years.
HS: So do you think there is opportunity in the new energy technology sector?
JR: Oh yeah, it’s going to happen – no question, it’s going to happen. But someday, a long way away. Wind power is not all it’s cracked up to be – it’s not that easy. You’ve got to have the right wind and, even in the best places, wind is only effective, say, 40% of the time. Solar energy is not competitive at present prices – it only will be if oil goes to $150 a barrel. New energy firms will end up making money; that certainly will happen as the price of oil continues to go higher and as the availability of hydrocarbons declines. And that may be what brings the oil bull market to an end someday – perhaps in 2018, 2022, whenever this commodities bull market is going to end. Yeah, there’s certainly going to be effective alternative-energy sources, but you won’t be able to get them working competitively in the next decade, no matter how hard you try.
HS: Let’s move on to the metals. Copper is making all-time highs.
JR: Again, nobody is opening any major new copper mines. Phelps Dodge, which I think is the second-largest copper company in the world, says it is just going to continue to develop and maybe enlarge its present mines. Most copper companies have made that same decision; most base metals companies have made that decision. Like oil firms, the big mining concerns are just buying other mining companies to grow instead of spending money on new mines.
HS: So prices will keep going up. You’ve come out often as being bearish on the dollar. It has rallied a lot this year. What are your views on its prospects now?
JR: In 2003 and 2004, everyone was selling the US dollar. It was on the front page of The New York Times for about three days in December 2004. That kind of coverage is always a sure sign that whatever the subject is, it’s about to go the other way. That rally is continuing partly because US has given the multinational corporations these gigantic tax breaks to bring money back into the US this year, so that is what they are doing. I don’t know how much further the rally has to go, but I have a feeling that something may happen to cause the final spike. It could be that Bush is going to pull out of Iraq sooner than expected, or it could be bird flu decimating Europe, but not America. But whatever it is that causes the final spike, I urge you to sell. I am still extremely bearish on the US dollar fundamentally in the long term. I have not sold any dollars for a while, but I plan to sell a lot more when, and if, the final spike comes.
HS: In favour of which currencies?
JR: Maybe the Canadian dollar, the Singapore dollar, the New Zealand dollar. The yen has been very weak recently. I’m not thinking about it right now because the US dollar rally hasn’t finished yet.
HS: We are about to see a regime change at the federal reserve. Ben Bernanke will be taking over from Alan Greenspan. What does that mean for markets?
JR: Disaster. Bernanke will probably ensure the demise of the Federal Reserve. It won’t be completely his fault – Greenspan has laid the foundations – but the problem is that Bernanke doesn’t understand currency markets. He is the guy who said we control the printing presses and we will run them as fast as we have to. He’s the guy who says it doesn’t matter if the US has its biggest trade deficit ever. I’m not the only person who’s getting worried about it. The Iranians are going to start trading oil in non-US dollars next year and there are other people starting to try to figure out what in the hell to do about this situation. Bernanke does not understand that – on the contrary, he thinks there isn’t a problem. You know we’ve had two Central Banks in the US before, they both failed and this one looks like it’s going to fail too.
HS: The long-term issues with the dollar aside, how do you see things panning out for the US economy next year?
JR: The economy has been, and is, slowing and will continue to slow for a variety of reasons. We will probably have a recession next year, but whether it’s short and sweet or the beginning of the end, I don’t know.
HS: That won’t be good for commodity prices will it?
JR: Maybe, maybe not. In the 1970s we had some horrible recessions, hard times all over the world. The UK, despite being one of the five largest economies in the world at that time, went bankrupt. The IMF had to come in and bail it out. But we still had a very good bull market in commodities. That doesn’t mean the same thing will happen this time round, but on the other hand, agriculture commodities are priced so far below their all-time highs it’s hard to see them falling, and the Chinese are not going to suddenly stop eating if America has a recession. They are also not going to stop wanting and needing electricity, many hundreds of millions of Chinese don’t have electricity yet and they are going to get electricity whether the US is in recession or not.
HS: Are you concerned about the global real-estate bubble?
JR: I am certainly worried about the UK, Spain, Netherlands, Australia and some parts of the US. I am short home builders in the US, for example, but in the US there are many states where real estate has done virtually nothing. You can go to Akron, Ohio and they don’t know there’s a real-estate boom going on. On the East Coast and in Florida and California, yes, there has been a bubble, but it is slowing pretty quickly. It looks as if it may have peaked in July and prices are now going down in much of the US. But look back to Iowa or Oklahoma and it looks different. Prices haven’t moved yet, but they will. All those farmers and miners are all going to be making a lot of money in the next 15 years and so prices will go up. In parts of Canada, real estate will continue to rise. And probably the Middle East too. There’s a huge boom there, but in places like that where the next decade will be a prosperous one, real estate will do fine.
HS: You say prices are falling in many parts of the US. How serious a problem is that?
JR: It’s going to be one of the causes of next year’s recession. I know of a building in New York on Fifth Avenue across from the Metropolitan Museum where there are only 12 flats in the building and four of them are for sale and they are not moving. The price war hasn’t started in the building yet, but it will. Inventories are building up in many places and the sellers are starting to realise that it isn’t so easy to sell as it was. At the same time, buyers are thinking, “Hey, we don’t have to rush anymore.” So it’s started.
HS: What’s your current view on global stockmarkets?
JR: Europe has been doing better than the US, partly because a lot of people are afraid to put their money in the US and also because the ECB’s monetary policy is even looser than the Federal Reserve’s. But I suspect that if the US has problems next year, Europe will have problems too. Maybe not as bad as the US, but problems nonetheless. And if the oil price keeps moving down, say to $45 or $48 (this isn’t a prediction), then there’ll be less money coming out of the oil-producing states to shift into markets. Overall, I would rather own Japanese shares than US ones right now. And I would rather own European shares than US shares, too. Still, I’m not urging you to buy Japanese shares. I own Japanese shares and I am not selling a single one, but at the same time, I wouldn’t buy a single one right now.
HS: So you think Middle Eastern money has been supporting European markets?
JR: Some of it is going to Europe, which is another reason those markets have done better than those in the US. These days, if your name is Mohammed, even if you are a fourth-generation American who has never been to the Middle East and doesn’t know who the prophet was, you can very well suddenly find yourself having your assets being confiscated and being questioned by the police for no real reason at all. This keeps happening and so they are afraid to put their money in the US. It’s less likely to happen in Europe, it’s less likely to happen in Japan and so a lot of this money is going into Europe and Japan and Asia.
HS: And into Middle Eastern stockmarkets?
JR: Yes a lot of it has been going locally, in the Kuwait market, all the markets, andSaudi Arabia. Prices are going through the roof. Stockmarkets in the Middle East are in a wild bubble – there are local chemical companies in Saudi Arabia that are worth more than BP. This, as I say, is partly because many Middle Easterners are afraid to put their money in the US and some are even afraid to put it in Europe, and so all that money is staying home and going into stocks and property. As I said, some of the stocks are unbelievably overpriced. But, as in most bubbles, just because they’re unbelievably overpriced doesn’t mean they can’t get even more unbelievably overpriced, that’s what usually happens.
HS: You say you wouldn’t buy any Japanese stocks at all at the moment. Why is that?
JR: The Japanese market has doubled in two years. That doesn’t mean it can’t double in the next two years – it fell 85% more or less from its peak, so has come from a very low base, and even having doubled is still far, far below its all-time high. But the pace of its rise has started accelerating and anything that has doubled in two years and is starting to accelerate… well, it is not my ideal place to jump in.
HS: But you’re comfortable with the fundamentals in Japan?
JR: More comfortable than I am with those in the US and many other places. The Japanese have huge business interests in China and that makes it one of the best ways to play China. They also moved a lot of their manufacturing to southeast Asia to cut costs, so the profits of the Japanese companies are continuing to do well. Maybe the workers in Japan don’t like the fact that the factories are now in Indonesia or Vietnam, or somewhere, but as far as the Japanese companies are concerned, this kind of move enhances their profitability. They are also not as dependent on the US as they used to be. Thirty years ago, I think something like 45% of their trade was in the US, but that’s shifted. Now around 45% of Japan’s trade is with Asia. So there has been a dramatic change in the last 30 years.
HS: Are there other stockmarkets around the world that you think are interesting?
JR: Natural resource economies look good. Canada would be better than the US if you were going to invest in North America. Brazil will do a lot better in the next 15 years than it has in the past quarter of a century. Even Argentina will do better. Peru, Chile – these are natural resource-based economies that are reasonably well managed. I’m not suggesting that Argentina is well managed, I’m just saying that it is better managed than places such as The Congo, for instance, and it’s better managed than it has been in the past.
HS: Have you invested in Latin America yourself?
JR: I do have some investments in Latin America. It’s going to be a whole lot better than it has been in the past because they are natural-resource-based economies and that’s where the money is. So if you have the time and energy to look abroad, it’s likely you’ll do better with most South American markets than elsewhere. They are going to do a whole lot better in the next 15 years than in the past 15.
HS: I know you’re particularly keen on soft commodities, but they are not moving much yet are they?
JR: If I could only buy one sector in November of 2005 – be it metals, energy or agriculture – it would be agriculture. Sugar has done extremely well, but it is still 80% below its all-time high. Coffee has done pretty well, but it’s still 70%-75% below its all-time high.These commodities still have enormous potential.
HS: So what are your favourite commodities right now?
JR: If I tell you my favourite commodities, you’d better sell them. I am just not good at timing. But if you looked at, say, coffee, or cotton, or soya beans, or maize, you might find some opportunities.
HS: What about China itself? We know it’s driving the price rises in a lot of these commodity markets, but what about investing in China?
JR: When I say I’m bullish on China, which I am, I’m talking about being bullish on it as a nation, as an economy, but not necessarily as a market. I’m still not buying Chinese shares. I had thought there would be a correction in China and that, as a result, there would be better opportunities to buy Chinese shares, but it hasn’t happened. I own Chinese shares, but I bought them in 1999.
HS: Are you still concerned there may be a correction or crash of any kind coming in China?
JR: I expect a correction in real estate – I would have thought it would have happened by now, but it hasn’t. Or not dramatically anyway. They tell me it is happening slowly though. As it goes on, I would expect a lot of speculators in real estate to get wiped out – maybe in the next few weeks or months. I thought they would have been wiped out already. But this kind of thing will make no difference to the wider growth story. If you’re in agriculture, or if you’re in coal mining, electricity – you are having one of the greatest booms of your life and it’s going to last for another 15 years. You know, in some parts of the Chinese economy they won’t have a clue that a bunch of real-estate speculators got wiped out in Shanghai or someplace.
If real-estate speculation collapses and a lot of people get wiped out, it will have some ripple effects, but the guy out there building electricity plants won’t even know what’s happening because he’s too busy and he’s making too much money. It’s the same for the farmers – agriculture in China is just booming. Many parts of the Chinese economy are going to continue to grow over many years to come, regardless.
HS: What about India?
JR: As a nation, China still has a much better future than India. I own a few shares in India Hotels because of the tourism, but I’ve owned these for a long, long time. No, I wouldn’t buy any Indian shares right now.
HS: And Russia?
JR: It’s a disaster spiralling down into a catastrophe. It’s run up, because of oil and commodities, just as Saudi Arabia’s run up, but I’m as pessimistic about the future of Russia as I am about the future of Saudi Arabia. Russia continues to disintegrate. All the ex-Soviet Union states continue to disintegrate. Ukraine may be the next to split into two or three pieces – they are all going to split up.
HS: Now that they have joined the EU, do you invest in eastern European countries?
JR: No. They don’t have much to sell to the rest of the world.
HS: You have said that you are thinking of moving to China. Do you mean it?
JR: We spent several weeks this summer in Shanghai and Singapore just seeing how we felt. I think it is more likely we would move to Singapore, at least at first, because Singapore is easier to move to than Shanghai. We have more or less decided to move to Singapore, it’s just a question of winding down in the US and gearing up in Singapore. Asia is extremely exciting. It’s like moving to London in 1805, or New York in 1905. The future is Asia.
HS: Thanks for talking to us.
Jim Rogers on gold: orange juice is better
HS: You’ve never been a great gold bug have you?
JR: No. I own some gold, but I think you will make more money in other commodities – like sugar – than in gold.
HS: But there is an increasing supply deficit isn’t there?
JR: Not as much as in some other commodities. One of the reasons that I’m not as bullish on gold as I am on other things is that the amount of gold being mined kept going up, even during the bear market. Seventy-five per cent of the money spent looking for metals is spent looking for gold. Nobody is out there looking for zinc, nobody wants to find nickel or tin – they’re all out there looking for gold. And don’t forget the mutual funds and the central banks have gigantic amounts of gold that they want to sell – I don’t know if they’re right or wrong to want to do so – it doesn’t matter what I think. But they do want to sell, so supply and demand is not nearly as good for gold as it is for other things.
HS: But if the dollar declines sharply, won’t demand for gold as a safe haven rise?
JR: Sure, but then again, all commodities are safe havens right now. Orange juice is a better safe haven, coffee is a better safe haven. If the world looks like it is about to come to an end, people will grab for gold and it will sky rocket, but they will also grab for wheat and maize and a lot of other stuff if the world is about to come to an end, because we desperately need to eat. Certainly, the Chinese are getting more prosperous and want more gold, but they also want more sugar right now – they want more everything. I own gold. I’m not bearish, I just don’t think you are going to make as much money there as in other things.
HS: What about silver?
JR: I own some silver too, but again, it isn’t a favourite. Due to technology, the demand from photography is changing quickly and there are still inventories of silver around the world – nothing like as much as there is of gold, but there are a lot more inventories of silver around the world than there are zinc or lead, and that will continue to be the case.
Recommended further reading:
If you would like to know more about legendary investor Jim Roger’s views on investing in commodities, see: Why Jim Rogers thinks you should invest in commodities; and Where are we in the commodities cycle? Go to our section on investing in gold for a full list of articles on all aspects of buying and selling gold.