₪ David Pescod's Late Edition June 12, 2006
To many people on Wall Street, Barron’s Magazine, the weekly
that comes out on the weekends has a broad following and frequently
affects stocks, bonds and the like the following week.
Usually it has a lot of emphasis on stuff like interest rates,
bond markets, who’s doing what to who in Washington and
stuff like that. There is also a lot of talk about stocks, but lately
there has been a whole bunch on high-tech stocks and not a lot
else. So we found no reason to follow it much.
This past weekend (June 5th) was a little bit different as suddenly
they are looking at commodities again. In a feature issue
that ran an article on Jim Rogers, they said “Confounding skeptic
investor Jim Rogers has been dead-right on energy, copper
and gold despite a recent pullback, he sees the boom lasting for
years”.
Actually, Barron’s had two feature articles for a change that
won the heart of those beaten up in the recent natural resource
sector and the first one is on gold. The technical guru at Barron’s
Michael Kahn wrote an article and suggested “The bull
rally should keep running with some missteps along the way.
Factor the weak dollar and some of the forecasts for big gains
in gold prices look quite reasonable. “Eclipsing the nominal
price peak of $850 set in 1980, certainly doesn’t look like a
stretch. But a smooth ride is unlikely”.
“How will the market take us there?” he asks in the column,
“Will it be via another parabolic rise or will it be an orderly
rally?”….that’s not clear, but what does seem likely he writes, is
“that we are approaching a good time to load up on gold
shares”. Needless to say, after the recent correction, we hope
he’s right!
In the article of Jim Rogers (in case you don’t know who he
is) we’ve mentioned his name in these pages several times in
the past. He along with high profile George Soros started the
Quantum Fund way back in 1973. With a very aggressive use of
leverage, managed to notch up a return of almost 4000% over
the remainder of the decade, despite the fact the stock market
did very poorly during that interim. Rogers then retired at age
37… and very wealthy.
Hopefully, you might have even read some of his books that
are both of interest and even timely and enjoyable today. The
first being “Investment Biker” and the second being “Adventure
Capitalist” as he roamed around the world looking for investment
opportunities over the last decade or two.
As far as what he is keen on right now, it’s something we’ve
featured here for much of the last two to three years and that is
simply commodity prices.
He mention in the article that “Just like the 1990’s in the
United States when Americans considered McMansions, gasguzzling
SUV’s, fancy appliances and electronics a national
birthright, gobbling up gasoline, natural gas, electricity, timber,
steel, aluminum and lead at a fearful rate”. Now the suggestion
is the same thing is going on elsewhere. “Add to
that desire the wants and needs of 1.3 billion Chinese and 1.1
billion Indians, all largely walled off from the global economy
during the last commodities boom, now joining the global
scrum for natural resources”.
He also points out that “China is now the number one
consumer of copper, steel and iron ore and number two in
the use of oil and energy products to feed its industrial maw,
which is growing at a prodigious rate of nearly 20% a year”.
He also again reiterates, “the torrent of textiles, refrigerators,
color TV’s and computers flowing to overseas outlets like
Wal-Mart” that the Chinese produce.
He also points out that the Chinese are in a “pell-mell rush
from a peasant economy to becoming an economic giant”.
One statistic we find of interest is that he mentions “Today
there are only 30 million private vehicles on the road in
China, versus 235 million in the United States, even though
China has 4 1/2 times as many people”. The demand for
automobiles alone could create huge demand for metals.
Now the suggestion is that after years of disinterest, “We
are only in the early part of a long term commodity price
boom that has years to run” he suggests. Rogers says, “The
commodity price boom is typically the product of years of
underinvestment in new productive capacity—whether in
exploration for new oil or metal deposits, construction of
new smelters and refineries or planting of new orange or rubber
trees—in response to lower prices. Meanwhile, demand
creeps up all but unnoticed until imbalances suddenly erupt
and prices surge”.
How long will this surge run? Rogers answers, “Based on
past longevity of commodity bull markets (and he points out
to one era from 1906 to 1922, 1933 to 1953 and another from
1968 to 1982) he said is could last another eight to 14 more
years”.
Of note to us who follow mainly the minerals and oil and
gas sectors, Rogers—one of the first believers in the oncoming
commodity price boom—in 1998 started his own index
for commodities. It’s been one of the top performing indexes
anywhere in the world except for the Korean Exchange.
What’s interesting is that in that Index, it’s not just industrial
metals from aluminum to copper to zinc, plus the
oil sector, but there is also a very heavy component in agricultural
materials from cotton to grains, where the demand
issue remains the same as the population in China suddenly
wants to upgrade their eating habits.
He also suggests that in this market like all bull markets,
it won’t be straight up. “Gold is on its way to its record of
$850 an ounce in 1980, suffered a 50% correction in the
mid-Seventies”, he points out.
He also suggests that with the recent bump, “there has
been no underlying change in the global economy. Supply
will remain constrained for some time and demand won’t
disappear. Not with China’s 1.3 billion people fired by rising
aspirations and epic entrepreneurial zeal”.
“The commodity boom like all bull markets, eventually
will end in a crescendo of hysteria”, he predicts.
We should point out that while Rogers was one of the
first to predict the boom, there are still those who simply
don’t believe it. Over the weekend in the Globe and Mail,
well-known Canadian commentator Stephen Jarislowsky,
who runs about $60 billion in investments, pension funds
and the like, mentions that of the $60 billion he runs, he
currently is invested in a few uranium producers, but that’s
it—suggesting that the metals markets are susceptible to
market manipulation and are to be avoided. “Metals are
nothing but a bubble, no different from the tech bubble” he
says.
While our own belief is that we’ll follow Rogers (rightly
or wrongly) for the next several years, but expecting volatility
as one does in every bull market. The one thing that
concerns us the most is interest rates. If interest rates do
start getting out of control, people simply won’t be able to
afford that new fridge, that new home, that new car—
whether it’s in the United States, India or China! |
