Commodities Get No Respect

When you make people 40 times their money - as Jim Rogers did over the decade of the 1970s - you hardly need an introduction...

Investment U Managing Editor Jay Livingston caught up with Jim earlier this month by phone from Shanghai. What does he say? Jim expects commodities to beat ALL other investments for the next 10 years... Here's what Jim had to say in its entirety...

Investment U: Jim, you start your new book with the line: 'Commodities get no respect...' Is that still the case now? Why is that?

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Jim Rogers: Well, it's maybe because people don't know so much about them... If you ask a stockbroker, most of them say, Go away and leave me alone, because they don't know anything about commodities. They fall back on the old tried-and-true answer that commodities are dangerous and people lose their shirts in commodities, which can be true, of course.

But I think it's just essentially, people don't know much about 'em. The brokers don't push them. The brokerage firms don't. Merrill Lynch doesn't even have any registered brokers for commodities anymore. In 1998, Merrill Lynch made the strategic decision to leave the commodity business because it was a bad business.

They're getting their toes back in now, but if you go into any Merrill Lynch office and say 'I wanna buy copper,' you can't do it. There's nobody there to sell it to you, because they're not registered. To be a commodity broker, you have to get registered, you have to go through that whole process. Merrill Lynch made the strategic decision in 1998 to get out of the commodity business because it was a bad business. That, by the way, is the year I started my commodity index fund.

Your Rogers International Commodity Index came out, dropped a bit, and just took off a few weeks after. It hasn't look back since, correct?

I rarely get things that close to the bottom, but this time, I did happen to get it pretty close to the absolute bottom.

How does this commodity bull market differ from the one you experienced from 1970-1980? Is it China?

Well, there's always something to cause supply-and-demand to get out of whack. And this time, the big demand is coming from China. Or an added element of demand is coming from China, so in that sense, yes...

But if you look back at the '70s, of course, there were plenty of economies - Germany was booming, Japan was booming - there were plenty of new economies on the horizon, which were growing.

This time, of course, China's so big and so obvious that everybody can focus on it. But something always causes supply-and-demand to be out of whack. That's why we've had huge bull markets in the past, and huge bear markets.

This is a very basic idea... supply and demand... But it gets right to the heart of how economies work, no?

The whole infrastructure... There's been no lead smelter built in America since 1969. I don't think there's been an oil refinery built in America since 1976. There've been no major oil discoveries anywhere in the world in over 35 years. And all those great oil discoveries are in decline.

Alaskan fields are in decline now. Mexico's in decline. The U.K. has been one of the world's great oil exporters for 25 years. The U.K. will be importing oil within the decade. Oil fields deplete. Mines deplete. If you look at wheat, the amount of acreage under cultivation for wheat is actually in decline over the past 25 years.

People have been going into other businesses because there's been no money in commodities. Again, it's very simple. It's happened throughout history. If people can't make money in an area, they leave it and they do something else. They go to where the action is. They raise cocaine instead of coffee, or whatever it happens to be. So it's all elements of supply - in nearly every commodity.

Commodities seem so simple on that level - supply and demand... How does investing in commodities compare with stock investing in terms of the average investor?

It couldn't get any simpler. And if you start looking into commodities, you'll see that commodities are a lot simpler and easier to analyze than stocks. For instance, natural gas is pretty dumb stuff. If there's too much gas, it's going to go down. If there's too little, it's going to go up.

Natural gas doesn't know who Alan Greenspan is, or care; it just cares about supply-and-demand. And once you've made that analysis, it's a lot easier to buy and sell natural gas than to start analyzing 300 natural gas companies around the world, where you have to worry about management and balance sheets and stock markets and unions and environmentalists and dozens of other things.

And you believe commodities can be less risky than stocks, too?

Well, Enron was a natural gas company. Enron went to zero. Natural gas can never go to zero. It can go down, obviously, but it can never go to zero. It's a lot simpler. It's just, people have ignored them for 25 years as people always do in a bear market - or in those 20 years, let's say.

You're right: people are starting to pay attention again. But even now, compared to the amount of time and money and energy spent on stocks and bonds, it's still... commodities still get no respect.

Talk a bit about commodities NOT being super high-risk relative to stocks. Enron being a prime example...

There was a great gold company called Bre-X. Gold has gone up in the last few years... well Bre-X went to ZERO. The world is littered with stories like that. And again, if you're going to analyze copper, say, once you decide that copper's going up, why not just stop there and buy the commodity rather than buy the stocks? Because you've got to do enormous amounts of analysis.

If you happen to find the right copper stock - or two, or three - you're going to make a lot more money, obviously. But the chances of you finding the one that's going to discover a gigantic new copper mine outside Chicago, or something, is pretty slim. So yes, if you find the right natural gas company or the right copper company you'll make more money. But most people don't.

Yale University did a study recently, which showed that you would have made 300% more investing in commodities themselves rather than commodity stock, for the reasons I just said. I mean, listen, in the '70s, oil went up 10 times, but there were a lot of oil companies which did nothing. Just because you're in the oil business doesn't mean you get rich.

What's your take on gold right now?

I own some gold and gold is a commodity, although there are people out there who think it's holy and mystical and different. I own some gold. I hasten to tell you, I own some personally. But gold's supply-and-demand situation is not nearly as positive as it is for other things.

75% of the money spent exploring for metals in 2003 was spent looking for gold. Nobody's out there looking for zinc or lead or tin; they're looking for gold. And, of course, there are the central banks... The central banks have stupendous amounts of gold, which they want to sell. I'm not saying they're right or wrong. But the fact is, there's a tremendous amount of gold overhanging the market, and that's not true of any other commodity.

If you were going to go into one raw commodity, what would it be?

I'd go into probably one of the agricultural commodities, if I could only go into one right now, because most of them are still very, very depressed, and that's where I think you would find better opportunities.

You can look at lots of things. In the '70s, world economies were in the tank, but we had a big bull market in commodities because there was no supply. So even though demand slowed down, supply went down even faster, so you had this gigantic bull market.

It's one of the things that's happening in oil right now: Supply is going down. And even if we have economic slowdown, unless somebody discovers a lot of oil very quickly, in a very accessible area... You know, if you find a huge oil field in Berlin or Tokyo or somewhere, it'll have an effect. But supplies are going down in all this stuff. And that's why I'm so optimistic on commodities.

You also talk about Hubbert's Peak... How far away do you think we might be from a global Hubbert's Peak in oil?

I'm not a geologist and I haven't been to all the oil fields in the world. I know there are people who are geologists who say we have passed the prime. I do know there have been no great oil discoveries anywhere in the world in over 35 years. I do know that all the great oil fields in the world are in decline. I mean, those are pretty simple facts that I haven't seen anybody refute.

Anybody you ask, including the Alaskans, will tell you that their field production is declining now. Even Saudi Arabia is under a cloud. They keep saying they're going to raise production and they don't seem to be able to do it in any meaningful manner.

If you look at the statistics on Saudi Arabia, in 1979, Saudi Arabia, some people from ARAMCO announced that Saudi Arabia's reserves were a total of 245 billion barrels - that was proven, possible and probably... 245 billion in 1979. In 1988, Saudi Arabia announced that they had 260 billion barrels of reserves.

Every year since 1988, Saudi Arabia has announced that they have 260 billion barrels of reserves. It is staggering that for 17 years in a row, the reserves have never gone up and never gone down. There have been no major new discoveries in Saudi Arabia. And in that period of time, Saudi Arabia has produced 63 billion barrels of oil.

So even Saudi Arabia - and I certainly have no clue about the reality of Saudi Arabia - but even in Saudi Arabia, the facts are beginning to be very, very, very suspicious.

Stocks and commodities are inversely correlated... a long, dark period ahead for the stock markets? Would going long commodities and short the stock market make sense?

Well, historically that has happened. When stocks have done well, commodities have done badly and vice-versa. When commodities have done well, stocks have not done well.

So yes, if history is any guide, and we're in that kind of period again, one would probably be much better off owning an index - a commodities index fund, or an index, say - and shorting a stock index. It would be a simple way to go through the next 10 or 15 years. That's if history is any guide.

By the way, I see this period as that kind of period. But again, remember, some stock markets and economies will do well.

Canada will do well. Canada in the '70s had a great stock market. It was a commodity bull market and they were a commodity country. So you can't just across the board say: Go out there and sell stocks and buy commodities. Because commodity-producing countries like Australia will probably do better than Belgium in the next decade.

But as a simple generalization - if history is any guide - yes, go long the Rogers Commodity Index Fund and short the S&P.

The Investment U E-LetteBy Dr. Steve SjuggeruChairman, Investment U