Hot Commodities | Jim Rogers

Published in: 2004

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The book was published in 2004 by financier and world tourist Jim Rogers, who co-founded the Quantum Fund with George Soros. Between 1970 and 1980, the fund had a CAGR of 46% versus S&P 500’s 4%. The fund years resulted in that Rogers could call himself financially independent by a good margin, after which he retired at the age of 38. He has since traveled around the world twice, once by motorcycle and once by car. The car trip has given him a place in the Guinness World Book on the topic “Most countries visited in a continuous journey by car”.

NEGATIVE CORRELACTION WITH STOCKS. During the 20th century, there were three bull markets in commodities; 1906–1923, 1933–1953 and 1968–1982. Over the past 130 years, equities and commodities have alternated in regular cycles lasting an average of 18 years. During the 1970s, commodities performed the stock market, but the following decade the outcome was the opposite. Between 1959 and 2004, commodities had a higher return, and slightly lower volatility, than the stock market. Rogers explains the negative correlation with the fact that when raw materials are cheap, companies can generally enjoy high margins. When commodities become more expensive, it hits the companies’ margins, which leads to depressed share prices.

ROGERS INTERNATIONAL COMMODITY INDEX. In 1998, Rogers began to worry about the valuation of the stock market and talked about investing in commodities and how the fast-growing Chinese market would act as a locomotive for commodity prices. Commodity prices were then, also adjusted for inflation, lower than at any time since the depression of the 1930s. He then created his own commodity index in which he also invested his capital ahead of the upcoming round-the-world trip. Rogers was right, between 1998 and 2008 commodity prices rose sharply. Since then, according to Rogers’ index, commodities have had a negative development until today [2021].

FORGOTTEN ASSET CLASS. In 2004, the turnover on the world’s commodity exchanges was many times greater than on the stock markets. Oil had the highest turnover. Coffee has on most occasions qualified as the second most traded commodity, despite the fact that only 20% of the world’s population are coffee consumers. According to Rogers, commodities should not be ignored and he thought that he became a better equity investor with knowledge from the commodities sector. By understanding the mechanisms in the raw materials sector, an investor can better understand how they in the next stage affect everything from food producers to real estate companies.

BACK TO BASICS. When Rogers analyzes commodities, he goes back to business 101 – supply and demand. He uses the CRB Commodity Yearbook and studies supply, demand, how large the reserves are and whether there are producers in areas where there is unrest. He also examines which industry is in demand for the raw material and what substitutes there are if prices rise too sharply. In general, commodities perform well during times of high inflation.

TRADING COMMODITIES = TRADING FUTURES. There are three players in the commodities market: producers, buyers and speculators. The producers are the mining companies, the forest companies, and the oil companies. The buyers are the ones in the next step in the value chain who use the raw material. The speculators are the investors who bet on the commodity price, but who have no interest in using the commodity. The speculators therefore never trade in the futures during the last trading month, as they do not want to be forced to take deliver on a batch of commodities.

COMMODITIES > COMMODITY-RELATED COMPANIES. When financial advisers talk about commodity exposure, it is usually through commodity-related companies. However, Rogers believes that the raw material companies are significantly more risky than the raw materials themselves. This is also strengthened by a study from Yale which showed that commodities over time performed better than the commodity-related companies. One difference between commodity-related companies and commodities is that the former can go to zero, which is not possible for the latter. The former also depends on the quality of management and the company’s indebtedness.

A COMMODITY-BOOM CAN BE A BOOM FOR A COUNTRY. When strong periods in commodities begin, it has a positive effect on the commodity-strong economies in many respects. A profit-generating raw material industry seeps through the entire business community, which leads to generally good times and strengthened currencies. As prices for copper, lead and other metals rise, the consequence is that the economies of countries such as Canada, Australia, Chile and Peru are to expect good times.

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