The Time for Hard Assets - commodities & raw materials
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05:15 PM 08|18|2000 Jim Rogers
With increasing worldwide demand for raw materials chasing reduced supply, the long run of the bears may be nearing an end. As the supply glut diminishes, a commodities investment may deliver the natural portfolio additive investors are seeking.
Editor's note: History shows that raw materials prices do not correlate with the price movements of U.S. equities. With equities teetering of late and bearish rumblings echoing through the market, now might be a good time to add natural ballast to the portfolio. So says Jim Rogers, a cultivated voice in the raw materials field. Only two years ago, when crude oil was at $12 a barrel and headed lower, and many other commodities were similarly depressed, Rogers seized the opportunity to launch his Rogers Raw Materials Index Fund (RRMF), which is based in turn on the eponymous Rogers International Commodities Index (RICI). Since opening for business on Aug. 1, 1998, the fund has advanced 48%.
Oil, of course, has skyrocketed, but it holds no monopoly for bullish performance by a raw material. Platinum, for example, was recently quoted at $612 an ounce in the London spot market, its highest price since 1987. The price improvement is a product of dwindling supply from Russia coupled with increased demand from car manufacturers, which use the precious metal in catalytic converters. The RICI tracks 35 commodities in all, and its founder brings proven scoping skills to this global challenge.
No armchair analyst, Rogers has been distilling raw data from the frontlines since January 1999, when he began a 73-country (to date) world tour that will conclude in 2001. Thus far, his research suggests that the prices of a number of raw materials will move higher as rising demand overtakes inelastic supply.
In a recent e-mail to Grant's Investor "postmarked" from Africa, the peripatetic Rogers advanced the case for investing in commodities:
"For the past two-and-a-half decades, raw materials investments were absolute losers -- a mirror image to the dazzling performance of tech stocks. The protracted bear market was fueled by tepid worldwide demand coupled with overabundant supplies of oil, metals, grains and the like. Desperate to raise cash, the Russians liquidated stockpiles of raw materials hoarded during the Cold War. Then, during its own economic crisis two years ago, Asia greatly curtailed its purchases of various commodities, further contributing to the supply glut.
"But a shift has occurred. Raw material supplies are diminishing just as global demand is heating up, dragging stocks on hand into record-low territory. The ratio of foodstuff inventories measured against average annual consumption has dropped to the low teens (compared to a record high of about 35% in the 1980s) and may remain there for years, even if the world economy slows.
"When global demand for raw materials continues to increase during a period of static and declining supply, the resulting price movements can be dramatic, as the doubling in the price of natural gas over the past year attests. And for several years running, underinvestment has characterized the global natural-resource industry. Virtually no one has opened a lead mine or developed a sugar plantation during this period. Quite the opposite: Productive equipment has deteriorated or been cannibalized or scrapped, while previously operating capacity has been closed. For example, more than a few Aussie mining companies, including Walhalla and Western Minerals, have abandoned mining altogether to establish an Internet presence, according to a report that first appeared last year in The Prospector, an Australian mining publication.
"Volatility in the sugar industry provides another example. Weather-related problems have cut production in Brazil, the world's largest sugar exporter, and output has decreased in Australia and the European Union as well. Across the board, fewer refiners are available to satisfy increased demand, exacerbating the supply/demand imbalance. Prices are reflecting the disparity, with London-traded white sugar recently recording its highest price in more than two-and-a-half years.
"Despite all the signs pointing to a commodities bull market, skeptics abound. The techno-bear case asserts that technology-induced efficiencies will permanently increase the supply of raw materials while tempering demand. One scenario envisions fuel prices declining as telecommuting obviates the need to travel to work in a fossil-fuel-consuming vehicle. Even without the current electricity crisis in California, the argument lacks historical validity. Take the hydrocarbon industry, for example. In the mid-1960s, drilling for oil offshore or below 5,000 feet on land was almost impossible. Then, an explosion of technological breakthroughs led to the development of 25,000-foot wells and to offshore drilling worldwide. The Hughes diamond bit drill ushered in previously unimagined drilling efficiency. Yet oil prices gushed 1,500% in 15 years.
"Now, petroleum geologists fire seismic charges into the ground to pinpoint the location of oil. The three-dimensional data that is transmitted back to analysts has enabled oil companies to lower their costs of production. But cheaper production costs do not affect global demand, which continues to increase inexorably -- whether from SUV-loving Americans or from Russians who now covet the very commodities they once unloaded to raise cash. The fact is, no previous advancements in transportation or communication have been able to suppress periodic, multiyear commodity bull markets. [Editor's note: We do not endeavor to validate or refute Rogers's assertion, preferring to let our paid-up subscribers weigh in on the matter.]
"Lastly, a perennial favorite of the naysayers is the idea that inevitable economic slowdown will moderate raw materials demand and, therefore, prices. But amidst the economic stagnation of the 1970s, raw material prices rose tremendously. Though hard times quashed demand for commodities like oil and gold, their diminished supply kept prices elevated. But the hard times have come and gone. Now waning global inventories are juxtaposed against increased worldwide demand and diminished supply of natural resources, making conditions ripe for the birth of a new multiyear bull market. Investors may want to keep their eyes on the horizon while funneling at least some assets into raw materials."
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