WASHINGTON, April 19 (UPI) -- Jim Rogers, famed Wall Street investor, thinks commodities are in a 10-15 year up-cycle. While Rogers may be downright wrong in many respects, he may actually be right on this one.
Rogers, a successful co-founder with George Soros of the Quantum Fund, made his non-Wall Street reputation a few years ago with a best-seller "Investment Biker" in which he went around the world on a motorbike, accompanied by an attractive blonde, to determine which developing countries were about to become investible emerging markets. For his latest book "Adventure Capitalist" (Random House, $27.95) he repeated the process in more countries, armed with a yellow Mercedes and a new blonde (who became his wife part way through the trip.)
The disadvantage of Rogers' approach to investment was graphically illustrated before the Washington Society of Investment Analysts Tuesday, during which he waxed enthusiastic over the prospects for China, while dismissing India in four words: India is a scam. Readers of the book will discover that in rural Jabalpur, India, some unfortunate villager, untutored in the norms of politically correct New York society, touched Rogers' girlfriend's bottom -- being a well-toned New York girl, she slapped him several times around the face, after which he fled, no doubt feeling as if he'd been in a punch-up with Mike Tyson!
Thereby, a billion hard-working Indians were immediately condemned to economic failure.
The so-called go round the world and find the noblest peasants'approach to investment carries the risk that, if those peasants, however noble, elect corrupt or leftist governments, their nobility will go wholly unrewarded and investors will lose their money. While I wouldn't recommend staying home altogether, a trip visiting some local companies and meeting bankers, central bankers and finance ministry officials is much more likely to produce accurate results.
It's a pity, because Rogers' understanding of investment fundamentals is otherwise pretty sound. In particular, his main recommendation during the meeting, that commodity prices are on a 10-15 year up-cycle while stock prices mark time, is highly thought-provoking.
Commentators conditioned by the long 1980s-1990s trend of declining commodity prices in real terms, with the decline accelerating during periods of economic weakness, have been surprised by the strength in oil and gold prices, in particular, since their nadirs of 1998 and 2000 respectively. Gold is currently hovering around $400 per ounce, around 50 percent above its 2000 low, although still 80 percent below its 1980 high, while oil prices are well over $30 per barrel in terms of Brent Crude, triple their 1998 low, and are as yet showing no signs of weakening.
Conventional wisdom will tell you that these are temporary increases, caused by special factors, that can be expected to reverse themselves as central banks sell gold and oil demand is brought back into line with supply over the spring. The Organization of Petroleum Exporting Countries, the oil supply cartel, is gradually losing its control over the world oil market, and cannot even police its own production quotas. Certainly, if the world economy turns once more towards weakness, commodity prices can be expected to fall sharply, and inflationary pressures to abate further.
Conventional wisdom, as is generally the case, is almost certainly wrong. On gold, my crystal ball is somewhat clouded, because supply of the metal is conditioned by central banks, which are still the major holders of it, while demand for the metal is largely driven by speculation that it may some day be used again as a monetary unit. Certainly further weakness in the U.S. dollar, which I expect because of the continuing huge U.S. payments deficit, would tend to drive investors towards the security of gold (over and beyond the pure arithmetic effect of the dollar's decline in terms of world purchasing power) but a decision by the world's central banks, particularly the Federal Reserve Bank, to reduce further their holdings of gold could overwhelm any such effect.
On oil, however, the picture is much clearer. As Rogers pointed out, no large-scale new oil fields have been discovered in 30 years, although there have been many minor discoveries. Many fields, such as Alaska's North Slope, the North Sea and even the Pemex fields in the Gulf of Mexico, are showing the decline in production that occurs as the fields reach the end of their useful lives. Meanwhile the probability of supply disruption, from Venezuela's political instability or further unrest in the Middle East remains substantial.
With oil prices at their current levels, I would normally tend to discount this analysis -- after all there are bearish factors to counterbalance the bullish ones. The decline in production from the North Slope and Mexico is in both cases due to political factors -- in Alaska's case due to Congress's refusal to open up the Arctic National Wildlife Refuge for drilling and future production, and in Mexico's case from the abject failure by the supposedly reformist Vicente Fox administration to privatize Mexico's notorious oil company Pemex, or in any significant way open Mexican oil production to foreign competition. Canada's Athabasca Tar Sands, for twenty years left untapped because production costs from the sands exceeded the international oil price, have now, through improved technology, been brought into production at an economic cost level of under $30 per barrel -- Canada is the one country in the world that may, through its tar sands, have more oil reserves than Saudi Arabia. Russia's oil companies, while bedeviled by political interference, including the arrest and indefinite jailing of the greatest of Russia's oil oligarchs, Mikhail Khodorkovsky, are increasing production steadily, and have the potential to provide a useful non-OPEC factor in the world's oil business.
There is however a further factor today, not present previously: the rapid and simultaneous economic growth in both India and China, countries whose populations total 2.3 billion, almost 3 times that of the developed world. Much attention has been paid to those countries' ability to compete with the West, and to their need for Western manufactured goods; much less attention has been paid to their thirst for oil and their hunger for commodities in general. 8 to 9 percent growth in Indian and Chinese gross domestic product produces very much faster growth in their oil consumption, in particular, as their citizens' incomes rise and the inevitable desire for automobiles takes over. In the first quarter of 2004, Chinese oil demand rose 18 percent, to 6.14 million barrels per day, two thirds of Saudi Arabia's oil production and the world's second largest consumption after the United States.
With supply limited in the short and medium term, the prospects for oil prices indeed appear bullish, with a return to 1981's peak of around $70 per barrel in 2004 dollars by no means impossible. Of course, that would have enormous knock-on effects on the world economy in general and the U.S. economy in particular.
Rogers, who is not particularly bullish on gold, instanced lead as another commodity whose price was likely to soar, since no new lead mine has been opened in 30 years. Here however he is on shaky ground; world demand for lead has shrunk dramatically over the last half century, as awareness of its toxicity has risen -- roofing, pipes and petroleum additives are all former rather than current uses for the metal. Silver is another commodity whose principal industrial use, photography, has been replaced by new technology.
But whatever happens to output in the West, the entry into the world's commodity markets of 2.3 billion Indian and Chinese consumers is likely to tighten the supply/demand situation for many commodities for a decade to come -- with huge implications for the world economy, almost all of them bearish and inflationary.
(The Bear's Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that, in the long '90s boom, the proportion of "sell" recommendations put out by Wall Street houses declined from 9 percent of all research reports to 1 percent and has only modestly rebounded since. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)
Martin Hutchinson is the author of "Great Conservatives" (Academica Press, April 2004) -- details can be found on the Web site greatconservatives.com.
