Raw materials prices are on the rise. The Rogers International Commodity Index, which represents the value of a basket of commodities consumed globally, has gained nearly 10% since the beginning of the year, compared with the S&P 500, which has only added 2.8% in the same period.
“The strong fundamentals behind commodities haven’t changed. All the things that have been going on the past 30 years are still in place,” Rogers noted. “Agricultural supplies are at their lowest in decades. The fundamentals didn’t collapse during this last crisis, there were just huge liquidations everywhere causing price declines.”
“Throughout history, whenever governments have printed money, it has led to higher prices on real things, and currently you have governments all over the world printing money,” Rogers said. “If you’re going to sell something, sell your stocks, because if economies are going to get better, then commodities will lead. And even if economies don’t improve, commodities are still the place to be because of the printing money situation and because of the supply situation.”
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May 20th, 2009 at 2:47 pm
I do agree with Mr. Rogers in the long-term. My concern, however, is that commodities are bubbling right now along with the rest of the financial markets. If you watch the markets, you’ll see that when markets are down, so are commodity related assets like mining, energy and agriculture. When financial markets are up, so too are the commodities. My personal view is that commodities will collapse along with the stock markets sometime this year — a short-term collapse. As Mr. Rogers said, I do believe that long-term, commodities will be the place to be, but i personally feel that if you didn’t get into commodities during the november or March lows, then you are playing with fire right now. Look what happened last year — it was a total collapse across the board, including gold. Commodities will be the leading assets to be in when the global economies start pulling out of the crisis, but you might be talk 3 years, 5 years or even 10 years, as both, Jim Rogers and Marc Faber have suggested.
Also, while i lean towards an inflationary end-game scenario, i am not 100% convinced this will be the end result. Wealth and credit are being destroyed at a much more rapid pace than money is being printed, according HS Dent, a leading economist worthy of reading. If deflation is the end-game scenario for this crisis, like the great depression, then commodity prices may remain depressed for quite some time. (Of course, gold/silver might be a winner in either scenario).
Just some thoughts.
Mac
May 20th, 2009 at 3:19 pm
Great post Mac. For readers out there, lets not forget when Jim Rogers talks about commodities and commodity cycles, he is thinking 15-20 years as discussed in his book “Hot Commodities”
May 20th, 2009 at 3:35 pm
While I have not read the book, I have heard Mr. Rogers say this on several occasions. Marc Faber, who has similar views, suggests a potential 10 year time frame. Even Harry Dent, Jr., who is a deflationist (but still very good), suggests a possible commodities collapse in the near-term (like 0 – 12 months), indicates that commodities may remain depressed over the course of the next 10 years. His theories are rooted in geographical population growth models and capital concentration. Dent sees an explosion of commodities starting around 2020 or so.
It is hard to say, so my personal opinion is, have some investments in commodities, especially good companies in agriculture and mining that will pay dividends while you wait.
Also, with geo-political tensions concerning energy, I think if one holds anything for the next several years, it should probably be oil and oil service providers with good dividends (like Canadian Trusts, etc.).
My motto for commodities is in line with that As-Seen on TV oven… “Set it and forget it” (unless of course there is a 50% rally, then i might lock in some profits
)
Mac
May 21st, 2009 at 9:47 am
I think Dent is wrong, even if deflation should be a concern, people still need to eat while we have a growing global population. I also believe Hubbert was right, oil is vanishing, and governments will not take action until the oil price becomes a major concern.
Also, you must look att the correlation between stocks and commodities, I’m sensing that the correlation is about to break.
May 21st, 2009 at 12:40 pm
Rick, good point on the commodity/stock decoupling. I am sensing this, most notably in gold/silver. I am not sure how this decoupling will fair if we have a complete collapse globally (in the financial markets).
Dent may very well be wrong, I can agree with this as well. But i am not going to bet everything on a hyperinflation scenario, just in case. The argument is that credit/wealth are being destroyed much faster and more severely than it can be created by increasing money supply. I won’t get into all of the math because, frankly, I don’t know it! haha
Agreed on the oil — so supply issues (and govt restrictions/policies) will more than likely be a major effect on the price in the near future.
One note on food — I agree people will need to eat, of course. But, there is a difference between needing to eat, and having access to the food they need to eat. there’re a billion people in Africa that need to eat — but they have almost zero impact on the price of food globally (I am guessing here). And, it seems, Western and Eastern governments could care less.
have a good one all!
mac
May 21st, 2009 at 1:03 pm
“I also believe Hubbert was right, oil is vanishing, and governments will not take action until the oil price becomes a major concern.”
Speaking of which, does anyone have a link to the report Jim rogers mentions that oil is declining 7%/year. I believe its an EIA? report.
May 22nd, 2009 at 2:33 am
I think the 7% report was the IEA WEO.
There is a speech by Faith Birol on the topic here: http://www.youtube.com/watch?v=m377Is4tGF0
with corresponding slides here: http://www.iea.org/Textbase/speech/2008/Birol_WEO2008_PressConf.pdf
January 7th, 2010 at 3:52 pm
What happens to gold/silver commodities when the fed begins to raise interest rates?