[JLK]

Hot Commodities : How Anyone Can Invest Profitably in the World's Best Market

Jim Rogers made his fortune as a hedge fund manager in the 1970's, a decade that most investers associate with economic malaise, and retired at the ripe old age of 37. Like many, I was enthralled with his narrative in the book Investment Biker of a motorcycle tour that he took around the world with an attaractive female companion in the early 1990s. His second book, Adventure Capitalist, chronicled a second trip through 116 countries that Rogers made with a second beautiful woman (now his wife) straddling the Millenium. Both books provide an educational and entertaining mix of adventure, investment insight and a view of different countries and cultures that can only be gleaned from on the ground experience. There are many reasons to envy Jim Rogers and the life he has made for himself.

The central theme of Hot Commodities is that equity markets and commodities take turns advancing as part of the normal business cycle. The 1970s was bearish for stocks, but unbelievably bullish for commodities. Rogers believes that a similar trend began in 1998 and will continue until at least 2011, and presents substantial economic data in support of his thesis. The two main factors Rogers identifies as driving the current commodities boom are depletion of existing sources and increasing world demand fed by the rise of China as an economic power.

Oil depletion factors large into Roger's analysis, but is just a subset of a bigger picture of changing supply and demand for an entire range of commodities. The book devotes an entire chapter to oil, describing Hubbert's Peak Oil model and the projections of energy experts such as Matt Simmons. Rogers has pored over the same IEA Oil Market Reports that I have, and not surprisingly has reached an identical conclusion- that at the end of 2004 world oil supply was 83.5 Mb/day and declining, while demand was 82.4 Mb/day and rising. Looking at the situation through the prism of a commodities investor, he sees a developing imbalance between supply and demand that usually marks the beginning of a long-term secular bull market.

According to Rogers, the end of a commodity bull market is usually characterized by a supply overcapacity that develops over time due to investments in infrastructure that are spurred by the rising prices. Again, he predicts that the current bull market will extend until at least 2011.

In the case of oil, however, Rogers isn't exactly predicting a buildup of supply capacity, which is interesting as philosophically he has much in common with the so-called "cornucopian" economists who predict that the free market will ensure a never-ending stream of abundant oil. He notes two simple facts that are well known to those who have studied the issue: (1) that no large oilfields have been discovered in over 35 years; and (2) that oilfields invariably deplete. He also notes that the two most likely sources of increased oil supply in the geologic sense are Saudi Arabia and Russia. As readers of Adventure Capitalist know, Rogers views Russia as a kleptocracy and has long been pessimistic of its chances for real economic growth. For the same reasons, he does not see Russia as a reliable source for increased oil supply; he sees profits from existing production ending up in Swiss bank accounts rather than being invested in infrastructure. In the case of Saudi Arabia, he notes the reservations that some experts (notably Matt Simmons) have about the reliability of Saudi reserve estimates and potential for increased production. He remains agnostic on the issue, but notes he has done well in the past when betting against conventional wisdom.

After describing a number potential alternative energy sources and concluding that they are hardly adequate as a substitute for oil, Rogers ends the chapter with a simple note: It's a good time to buy some oil. While this advice is eminently practical from an investment standpoint (I certainly intend to follow it), I find Rogers' analysis somewhat lacking in that it fails to take into account consequences of the second order: how oil supply shortages and the resulting high prices will affect the industrialized world's economy, and what that in turn will do to demand for the other commodities he discusses. He does point out in the book that a poor economy didn't stop commodity prices in the 1970s from going through the roof. In the 1970s, though, it was clear that the disruption in oil supply was largely political and temporary. I think it is reasonable to expect that a prolonged and perhaps interminable decline in oil supplies will do much more serious damage, both economically and politically. Certainly, I think mid-term investments in such commodities as oil, lead (used in deep cycle storage batteries), copper (hybrid cars use a lot) and natural gas (we're running low on this too, at least in North America) are almost certain winners.

In the long run, though, an investment in arable farmland with a good wood lot, horses and loads of ammunition might pay off more.

[JLK]

As a postcript, Jim Rogers has now predicted $150 dollar per barrel oil within the next ten years. For those interested in investing based on Rogers' predictions, the Rogers International Commodities Investment Fundis open to individual investors.

[tdrive]

$this->bbcode_second_pass_quote('', 'J')im Rogers has now predicted $150 dollar per barrel oil within the next ten years.

[MicroHydro]

Platinum is needed for refineries processing heavy sour crude oil.

Gold and Silver are needed for the electronics that make wind and photovoltaic systems work.

More mouths to feed and declining agricultural yields are bullish for food. Whatever money people have left, food is going to be the number one spending priority.

Steel is a question mark. The collapse of the auto industry could be bearish for steel. But whatever steel is produced will be expensive due to energy cost.

[DantesPeak]

Jim Rogers has a good record in the commodities market, so it might be worth looking at what he has to say:

$this->bbcode_second_pass_quote('', 'J')im Rogers, former hedge fund manager, on Cavuto on Business this weekend:

"Two hedge funds have collapsed recently, have driven down the price of natural gas. Two things:

It's gonna be cheaper to heat your house if you use natural gas; if you don't use natural gas, switch to natural gas.

But secondly, buy natural gas, you'll make a fortune."

Jim Rogers is probably counting on three things to support this trade: First, that the blowup of these two hedge funds has created a temporary dislocation in the price of natural gas to the downside, and secondly that natural gas is now trading at the low end of it's range in it's normal relation to oil. This idea is also supported by energy analyst Kurt Wulff, who recently wrote "Natural gas may not have positive price momentum, but it has value at near the lowest ratio to crude oil in the 00's decade." Finally, we are just ahead of winter and natural gas has a tendency to spike sharply if you get a period of very cold weather during the winter.

[Heineken]

I have been buying energy stocks heavily during the past three weeks, after selling them off in August, in most cases for large profits. (In my elderly parents' IRA portfolio, which I manage; my own stocks I don't normally trade, since they're not in an IRA.)

Although I've only lost money since buying them back, I'm confident that over the next few years all these stocks are winners and that all the prices they've traded at this year, including at their intrayear peaks, will ultimately be bargains.

Many of these stocks, like Anadarko, Apache, and some of the Canroys, sport single-digit p/e's and are flush with cash.

I agree that natural gas stocks are particularly attractive here.

Coal also looks very good after getting absolutely killed.

[Colorado-Valley]

Whatever happened to ethanol?

Did all the corn farmers get rich this year? What happened to all those Midwesterners putting their life savings into ethanol plants?

[Bleep]

$this->bbcode_second_pass_quote('Colorado-Valley', 'W')hatever happened to ethanol?

Did all the corn farmers get rich this year? What happened to all those Midwesterners putting their life savings into ethanol plants?

[bobbyald]

I would like to buy some natural gas but I’m not quite sure where to store it. I have got some rather large bags that might do the job but I run the risk of floating off into the stratosphere if I forget to put my lead boots on.

Could this explain why the future price of NG is actually a lot higher than todays spot price? (Spot = 4.5, Jan2007=7.8, Jan2008=9.0) If I buy shares in a company or trust the price will be heavily based on these expected future prices and so will not be that cheap. In fact if the price of NG fails to double by Jan2008 you could make a loss.

No, I still think buying NG at spot and home storage is the way to go. Just in case this catches on I’m long balloons and lead boots.

[rockdoc123]

Just a bit of a warning here, although all it takes is a cold winter to suck down the gas storage to nil there is now identified a weak El Nino forming in the Pacific. If this strengthens and lasts through to early 2007 it will result in warmer than average weather in the main gas consuming areas, hence continued weakness in gas prices.

[DantesPeak]

$this->bbcode_second_pass_quote('rockdoc123', 'J')ust a bit of a warning here, although all it takes is a cold winter to suck down the gas storage to nil there is now identified a weak El Nino forming in the Pacific. If this strengthens and lasts through to early 2007 it will result in warmer than average weather in the main gas consuming areas, hence continued weakness in gas prices.

[rockdoc123]

$this->bbcode_second_pass_quote('', 'T')hanks rockdoc123. Scientists are not in complete agreement that arrival of El Nino necessarily always results in a milder winter, which is usually what we hear in the media. Some say the initial phase of El Nino actually results in colder weather to the eastern US.

[DantesPeak]

Unhedged producer Chesapeake shuts in 6% of production because of low prices:

$this->bbcode_second_pass_quote('', 'S')ept. 27, 2006, 2:33PM
Chesapeake to Shut Some Gas Production


OKLAHOMA CITY — Oil and gas producer Chesapeake Energy Corp. on Wednesday said it plans to temporarily shut down about 6 percent of its natural gas production due to low market prices.

Starting Sunday, the company said it will temporarily close down about 100 million cubic feet per day of unhedged net natural gas production in the Southwest, until gas prices recover from recently depressed levels.

The company currently produces about 1.6 billion cubic feet of natural gas equivalent per day. Chesapeake said it has hedged about 92 percent of its expected gas production at an average price of $9.24 per million British thermal unit.

[Heineken]

$this->bbcode_second_pass_quote('DantesPeak', '')$this->bbcode_second_pass_quote('rockdoc123', 'J')ust a bit of a warning here, although all it takes is a cold winter to suck down the gas storage to nil there is now identified a weak El Nino forming in the Pacific. If this strengthens and lasts through to early 2007 it will result in warmer than average weather in the main gas consuming areas, hence continued weakness in gas prices.

[rockdoc123]

$this->bbcode_second_pass_quote('', 'T')he El Nino news is already old news and is already mostly priced in, I believe. It's one of the palette of explanations for the amazingly low current price of NG.

I'm a buyer of NG stocks here. I don't see how one can go wrong if one buys quality stuff and is prepared to sit on the stocks.

[DantesPeak]

A Singapore news sources report today that Jim Rogers will be leaving the US and moving to Singapore, mainly because he sees Singapore as having a better standard of living.

From his view in the Far East, he sees the US entering a recession and also commodity prices continuing to rise further – even though the commodity bull market is already in its seventh year.

A quote from Bloomberg today:

$this->bbcode_second_pass_quote('', ''')'We are in a bull market in commodities,'' said Jim Rogers, who co-founded the Quantum hedge fund with George Soros in the 1970s. ''Supply has fallen and demand has risen. Asia has boomed in the last 25 years.''

[firestarter]

Depending on who's doing the number crunching, we're already in the midst of a recession. Once the consumer herd realizes their plight and starts the retrenchment away from spending money they haven't earned, then, depending on the degree of consumer pullback, we potentially get the Great Depression II this time round. Like Bob Prechter intones, follow the consumer's $$$$ behavior (it's beginning to show signs of malaise), and then batten down the hatches for the inevitable stampede away from spending. The easy credit driven boom's end is nigh.

There's still 6.2 billion consumers around the globe, not up to their eyeballs in debt, which central banks can concentrate on enticing now that the American consumer is mostly tapped out. Signpost up ahead for Americans reads austerity, no growth, high prices.
Stagflation here we come. Plan accordingly.

[Colorado-Valley]

So how is it you plan for stagflation?

(I bought some gold and silver, paid off debt, cut expenses and bought a small farm. I'm not sure what else to do ...)

[DantesPeak]

Well I agree with Rogers’ inflationary view, which is the commodities boom will be deflected but not stopped by a US recession.

In the early 1930s in the midst of a deep depression, the US dollar was greatly devalued against gold to stop deflation and help get the economy moving. While thing’s won’t repeat exactly the same way next time, the Fed is able and willing to print huge quantities of electronic money. If one needs an example, the Fed created $80 billion on new money in the week after 9/11.

This shows me that the next major depression will likely be inflationary and not deflationary.

Where to invest (if you already have the necessities) – besides commodities in general - those countries with trade surpluses – and others like China which are just printing up a lot of new money – have invested a increasing share of their reserves into gold.

[ProfitOfDoom]

$this->bbcode_second_pass_quote('firestarter', '
') There's still 6.2 billion consumers around the globe, not up to their eyeballs in debt, which central banks can concentrate on enticing now that the American consumer is mostly tapped out. Signpost up ahead for Americans reads austerity, no growth, high prices.
Stagflation here we come. Plan accordingly.