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An Interview with Jim Rogers - 3/17/2005 |
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By Jim Rogers
March 17, 2005
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In this KitcoCasey exclusive, we talk to Jim Rogers, author of the bestselling
book “Hot Commodities” and pioneer of the Rogers International Commodities Index, a basket of 35 metals and industrial
and agricultural products, which has risen more than 200 percent in value since July of 1998. Jim tells us why commodities
are the best buy around these days, and outlines his strategy for profiting from the current bull market.
Jim,
let’s start by talking a little bit about your approach to investing in the current commodities bull market. You’ve
written that you take a long-term view – you find things with good fundamentals and then hold them. We’ve seen
a bit of a consolidation lately in things like gold. Do you try at all to play those ups and downs?
JR: No. I’m
a hopeless trader and a terrible market timer, so I don’t bother.
So you buy things that you plan to hold
for some time?
JR: Until the basic fundamentals change. Then you get out.
What sort of timeline do you
generally have on an investment? Years?
JR: Normally, yes. That’s the best kind of investment. The ones
you don’t ever have to sell, because then you don’t have to pay taxes. There’s not many of them but they
do occur occasionally.
You’ve written in your book “Hot Commodities” that you thought lead might
be one such good long-term investment. Is that still the case?
JR: Well, I didn’t say I really liked lead.
I was using lead as an example, as a teaching point, because in the commodities markets there are two factors that determine
prices – supply and demand. Lead has lost two of its major demand sources – paint and gasoline – and yet
despite that, lead is at an all-time high because the supply of lead went down much, much faster than the demand. I was trying
to show that, people say, well, what if we have a recession? That chapter was designed to show that you can have recessions
and slowdowns and you can still have a huge bull market.
Looking around today, are there any commodities that have
especially good fundamentals?
JR: With commodities it’s like anything else – you want to buy the things
that haven’t moved up yet. Orange juice and cotton and soybeans and sugar, these are places where you might start looking
because they are down and there may be some fundamental changes taking place.
Of course we like all investment
opportunities, but we’re particularly interested in the metals, where it seems like almost everything has moved up already.
JR:
That’s right, everything has moved up. Conceivably palladium – it hasn’t moved up as much as the others.
Conceivably silver. I own a little of both.
And as you say, lead is an interesting one.
JR: There’s
no question that the lead market is solid. But again, that was just an example in the book, like gold. Yes, I own some gold
and silver, but I think you’ll make more money in other things right now.
But you do see upside for all commodities
in the long-term.
JR: There’s no question about it. This bull market still has several years to go. Nobody’s
brought a new tin mine on-stream in the last year or two. The reason that bull markets in commodities last a long time is
because it takes a long time to bring this stuff on-stream. Even with agricultural products. It takes a coffee tree five years
to mature. It takes a rubber tree several years to mature.
What about gold? You’ve written that its fundamentals
probably aren’t as good as other metals’.
JR: I own some gold. But, yes, I think I’ll make more
money in other things in the meantime.
So, do you own gold more as a hedge against economic troubles?
JR:
It’s an insurance policy, if nothing else. If the world suddenly comes to an end, gold will go up the most. Whenever
we have a sudden crisis, people will jump into gold. Whether they should or not, they will.
Gold is more a bet
on human psychology than on fundamentals?
JR: Exactly. The fundamentals of gold are among the worst of any commodity,
probably the worst.
That’s not something you hear a lot from the gold community.
JR: Well,
they’re all mystics. Gold mine production has expanded nearly every year since 1980, when the bear market started. You
don’t find that anywhere else that 25 years into a bear market, production is still expanding. In 2003, 75% of the money
spent on exploring for metals was spent exploring for gold. There are still a lot of mystics out there who want to own gold.
I own some too, don’t get me wrong, but you have to understand the reality.
You developed the very successful
Rogers International Commodities Index, and in it you have copper and aluminum weighted higher than the other metals. Why
is that?
JR: Look around your house and I suspect you’ll see a lot more copper and aluminum than gold. I
mean, if you like gold you might have a lot in the closet, but in most people’s lives copper and aluminum are more important
to doing business and staying alive. The index is designed to be some reflection of the cost of doing business around the
world.
There’s been some speculation that over the next few years we may see a synchronized economic slowdown
in China and the U.S. and therefore some people feel that base metals may not be a great buy. Any thoughts?
JR:
I expect a hard landing in the Chinese real estate community this year. It could happen, although the Chinese say that I’m
wrong. But I think there will be a heavy landing and it will cause everything to go down, at least for awhile. But if you
see newspaper headlines saying “Problems in China”, pick up the phone and buy all the commodities you can. And
all of China you can. It’s a temporary thing.
So, if a recession hits and copper prices drop, you would just
buy more.
JR: Absolutely. I expect it to happen. Now, I’m not selling my copper just because I expect it
to happen. I’m a hopeless trader. And it may not happen. But if it does happen I expect to buy more commodities.
The
classic plan – buy on the dips. But that raises an important question: as an investor, how do you tell the end of the
secular cycle from the small hiccups along the way to higher prices?
JR: We’ll know. Right now in stocks
and bonds there are 40,000 mutual funds around the world. There are fewer than five commodity mutual funds. You’ll know
when the cover of Fortune magazine has farmers and miners on it. The Wall Street Journal will have a whole section
on commodities. Right now they have six or eight paragraphs every day about commodities and a whole newspaper about stocks
and bonds.
In other words, we’re just getting started.
JR: If you believe that fewer than five
mutual funds is the top of a bull market, then we see the world differently.
How long does it typically take in
a bull market before the mainstream takes notice?
JR: Like everything else, if it goes on for a few years, more
and more people start to notice and it picks up steam. We’re six years into this bull market. In 1988 if I had said
to you, you should be buying stocks, people would have said, “My god, stocks have tripled, how can we buy stocks?”
But then stocks went up five or six times after 1988 and gathered momentum all along the way.
There’s been
some speculation that segments of the commodities markets such as uranium may be getting overheated. Could we be due for pull-back?
JR:
There may well be. If there’s a hard landing in China everything is a little overheated right now. But, to repeat myself,
with fewer than five mutual funds in the whole commodities world, and 40,000 mutual funds in stocks and bonds, I hardly think
this is the end of a bull market.
There is yet more upside.
JR: Absolutely. Even oil should be more
than twice the price it is now, just to be adjusted for inflation. And inflation numbers are fraudulent – the U.S. government
reports inflation numbers that are false. Oil should triple if you use the real inflation numbers.
So, even at
$50 a barrel, oil is a good investment, long-term?
JR: Many people will tell you that the price of oil should be
$35 or $28. It’s true that if there’s a hard landing in China it may dip down. But I say to these people, tell
me where the oil is coming from that’s going to drive down the price down and keep it down. There have been no giant
oil discoveries anywhere in the world in over 35 years. I want to know where this oil is coming from that’s going to
drive the price to $28. If it’s out there I want to know about it so I can buy it myself!
Right. Even OPEC
have abandoned their $22-$28 price target.
JR: No one knows where the oil is. All these people who are saying oil
is going to go down… there might be some blips along the way, but where is the oil that’s going to drive it down
and keep it down? Oilfields around the world are in decline. The U.K. has been one of the world’s great oil exporters
for 25 years. But it’s going to be importing oil within the decade.
In terms of your investment strategy,
what sort of a trigger would you look for to start selling the oil you own now? Is there a specific price you’d pick
as the top?
JR: In 2014 or 2018, I’ll think about selling oil. But right now I have no intention to sell.
So,
is your strategy based on the observation that these bull cycles tend to last about 18 years? You wouldn’t sell until
around the end of that period?
JR: I’m a horrible trader. I don’t see any reason to sell. Anyone who
sold stocks in 1987 when they collapsed made a horrible mistake. Anybody who sold in 1989 or 1990 or 1994 made a horrible
mistake. If somebody discovers a gigantic oilfield in Berlin or Chicago or Tokyo then I would consider selling oil. But even
if someone discovers a gigantic oilfield, it has to be accessible. In the 70s, oil went up ten times even though gigantic
discoveries had been made – the North Sea, Alaska, Mexico. We all knew that there were gigantic amounts of oil out there
that had been discovered and were coming on-stream. Oil still went up ten times because it didn’t get there fast enough.
For
the commodities you own, are you assessing the supply and demand fundamentals more or less continuously to see if anything
has changed? How often do you take a good, hard look at things?
JR: I don’t have an answer to that. If I
see in the headlines that they’ve discovered a gigantic oilfield, I’ll notice and I’ll think about it.
There’s
been a lot of speculation that this commodities bull market is stronger than previous ones because of the phenomenal economic
growth happening in Asia. Do you agree?
JR: In the seventies, there was gigantic growth in Europe, which is maybe
somewhat comparable to the growth that’s taking place in Asia right now. Though I suppose that’s not quite accurate
because Asia is so much bigger than Europe was. This one may be bigger than previous ones because of Asia. Another factor
that may make this one bigger is the fact that the U.S. is now a debtor nation, whereas during previous commodities bull markets
over the past 150 years or so the U.S. was either a creditor nation or becoming a creditor nation. Now we have a horrible,
horrible situation in the U.S. and the currency is under suspicion, if nothing else, and so in terms of commodities trade
in dollars that may be the icing on the cake and make this bull market bigger. But Asia is much bigger – there are 3
billion people there. We’ve never had a growth area with 3 billion people during previous commodities bull markets.
And
is that growth good for commodities across the board?
JR: Everything is going to go up because of the fundamentals.
Meaning
the increased demand from Asia.
JR: And reduced supply. There’s been one lead mine opened in the world in
25 years. No major oil discoveries in over 35 years. The last lead smelter built in the U.S. was in 1969. That’s 35
years ago.
Do you see a similar lack of supply in other metals? In nickel? Zinc?
JR: There’s one
nickel mine coming on-stream, either this year or next, I forget which. There’s not a whole lot of new production of
any metals coming up. Except gold. People are still opening gold mines. But for no other metals do you see a lot of new production.
So,
for most metals you see both a supply shortfall and a demand increase?
JR: Absolutely. It takes a long time to
bring a new metals mine on-stream. There just aren’t many around. Some people are starting to expand a little bit, but
when you expand an existing mine almost by definition you’re going to the marginal ore because you mine the good ore
first. So when you expand, you don’t expand production as much as it would seem from the amount of money you spend.
Great
insights. Thanks, Jim.
JR: Thank you.
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