Kontent Review

Commodities, China
& Gold
Interviewed by Peter Schiff, President and Chief Global Strategist

There was a great division between me and many other analysts.
I can remember some of the TV interviews I gave in the late 90s.
The moderators were giggling and drooling over the latest
doc.com success, just when I was saying buy commodities and
buy China. By the end of the commodity boom, in 10 or 15
years, everybody is going to be giggling and drooling on the
financial TV shows, and saying “buy commodities.” Of course, if
I am on the shows at that time, I’ll be saying it’s time to sell
commodities. And they will would be giggling and drooling,
saying, “Oh you old idiot, don’t you know commodities always go
up. Don’t you know, this time things are different.” Of course,
things will not be different. But in 2018 or so, everybody’s going
to be shrieking about commodities. There will be shortages. And
there well may be wars over commodities, between now and
then.
Exclusive Interview with Jim Rogers:
Commodities, China & Gold
Peter Schiff:
In the late 1990's, most investors saw the brave new world of
tech as the way to instant riches. You, instead, were focusing on
commodities. Tech has collapsed, and commodities are booming.
You were right, of course.
Jim Rogers:
In addition, one has to consider this: that the demise of the
dollar is part of this problem. But overall, the commodity
situation is not simple. It’s very complex, with many factors
contributing to the world wide shortages. But, in the final
analysis, there are shortages of commodities, and the shortages
are getting worse.
Peter Schiff:
You always stressed the overwhelming importance of potentially
explosive demand from China. You’ve also noted that the
authorities there would periodically try to rein in runaway growth
COMMODITIES, CHINA & GOLD 3 - EXCLUSIVE INTERVIEW WITH JIM ROGERS
to keep things under control. It now increasingly looks like the
overriding concern of the Chinese is in fact to keep the economy
growing at all costs, in order to keep employment growing. What
are your thoughts now on that score?
Jim Rogers:
Well, they’re still trying to keep the economy growing. But the
main thing the Chinese ware doing is trying to avoid economic
bubbles. For example, they have been trying to cut back on real
estate speculation in China. They have been successful, at least
to some extent, in real estate. Prices have weakened in many
parts of China and some speculators have gotten into trouble.
I’ve always said that the main part of the Chinese economy will
continue to do well, even though speculators in Shanghai go
broke. If you’re out there building infra-structure, or in the coal
business or agriculture, or in many other areas of the Chinese
economy, you will do well. Yes China is interested in increasing
employment, and keeping the economy strong. But
simultaneously, they are trying to keep things from overheating.
The right sectors in China will continue to be very buoyant.
Peter Schiff:
Let’s talk specifically about commodities and energy. To what
extant can technology and alternative fuels rescue us from the
commodity and energy shortage? I’m thinking about
nanotechnology, nuclear power, gas hydrogenation to provide
clean-burning coal, solar energy, etc.
Jim Rogers
Yes, technology can help, of course. But all these new
innovations take enormous amounts of time to be developed and
enter the marketplace. Eventually this commodity bull market
(which includes energy) will come to an end, Peter. If history is
any guide, some time between 2014 and 2022, the bull market in
commodities will come to an end. That’s based on history, that
is not a prediction. The average commodity bull market has
lasted about eighteen years. Something eventually causes it to
come to an end.
Let’s look at alternative energy sources, for example. If we all
decided today we wanted to have wind power, we couldn’t. You
can’t get windmills. You can’t change the world that quickly.
And solar is not competitive right now. Eventually it might be.
But if we all decided today, Peter, to have solar panels on our
roofs, you can’t get them. You can’t change that quickly.
Nuclear of course, is making a come-back. But it takes years to
build a nuclear power plant. And remember in the mean time the
old plants are all becoming obsolete. The power plants in
America are thirty to forty years old. So by the time a new one
comes on stream, those plants will be forty or fifty years old.
There has been massive underinvestment in things like mining,
oil exploration, and agricultural development. Agricultural land is
left fallow. Plantations give way to real estate development.
Renewing commodity infrastructure, finding new sources of
commodities, new oil fields, developing new plantations takes
lots of time…years in many cases. Only one new lead mine
opened in the world in twenty-five years!
Technological changes are coming, of course. But it just takes a
long, long time. We don’t reverse these things quickly. Almost
every oil country in the world has got declining reserves. All the
major oil companies are quite open about the fact that they are
not replacing their reserves, not by discoveries anyway or
development. Maybe they’re buying other oil companies. But
that’s not increasing the amount of oil in the world. There’s
going to be something to cause this bull market to come to an
end, someday, but the emphasis should be on someday, because
someday is a long way, away.
Peter Schiff:
There is still a lot of money to be made by investing in these
commodities. Which brings me to my next question: Would you
comment about the differences between renewable commodities,
like trees, agricultural products, solar power, on the one hand,
and depleting categories on the other?
Jim Rogers:
If I were looking at commodities these days, I would look at
things like agriculture. Because agriculture, for the most part,
has moved up less than metals or anything. You know, cotton is
still 50% below its all time high. Soy beans are something like
60% from the all time high. There are fundamental changes
taking place. The amount of acres devoted to wheat around the
world has been declining for 30 years. The world has consumed
more corn than it has produced for five years in a row. That’s
never happened in recorded history. The worldwide inventories
are low, on a historic basis. And that’s without a drought. We
haven’t had a major drought anywhere in the world for some
time. We used to have them all the time. Will we never have a
drought again? I doubt it.
And, by the way, increasing agricultural production is not as
simple as just planting as few seeds. Take coffee, for instance. It
takes five years for a coffee tree to mature. If you and decided
to go into the coffee business today, it would take our plantation
a long time to come on stream and mature. . You don’t snap your
finger, and magically fruit tress cotton plants, soy bean bushes
appear. And in the meantime, the price of everything those
farmers use is skyrocketing: natural gas, diesel fuel, labor,
insurance, etc. Everything they use to produce their products it is
also going up in price. So it takes a high price for them to start
bringing on marginal land to produce new and more products.
Peter Schiff:
Possessing valuable commodities is one thing, but that means
little if they are located in geographically unsafe areas of the
world. Have you tended to concentrate your investments in the
U.S., Australia, Canada, New Zealand, for example? Are there
any other geographic areas you like?
Jim Rogers:
Well, the countries that have raw materials are obviously going
to be a better place than ones that don’t – all other things being
equal. But remember those words, all other things being equal. COMMODITIES, CHINA & GOLD 6 - EXCLUSIVE INTERVIEW WITH JIM ROGERS
The Congo has huge amounts of raw materials. But I am not
investing in the Congo. I don’t think its going to be a good place
for my money. I prefer areas with lower geopolitical risk. Canada
has, perhaps, the soundest currency in the world right now, and
a strong economy. If you want to invest in North America, the
best place to invest is Canada, whether it’s directly in the
economy, the stock market or the currency. That’s the sort of
place you want to be focusing on in times like these.
Peter Schiff:
We have a lot of our clients invested Canada. It amazes me that
the Canadian fundamentals are now so good. Don’t forget,
Canada used to be leftist, and had so many problems. Now it is a
far safer place to invest that the United States.
Jim Rogers:
One of the reasons for their problems was that commodities were
cheap, and Canada is a commodity-based economy. So, of
course they had huge problems. So did other countries whose
economies were driven by commodities. Partly because of those
problems, it forced some of the Canadian politicians to wake up.
They have now had a balanced budget for, I think, eight years in
a row. They have had a trade surplus for ten years in a row. And
now of course, they have the bull market in commodities at their
back. Because of the great long term commodity outlook, as well
as some other reasons, Canada offers better investment
opportunities the U.S.
Peter Schiff:
When it comes to investing in these commodity driven countries,
you don’t necessarily have to be invested in just the pure
commodity plays. Just about any investment in a commodityoriented
country would benefit from the overall growth of that
country’s economy. And it is probable that the country’s currency
would also be strong. COMMODITIES, CHINA & GOLD 7 - EXCLUSIVE INTERVIEW WITH JIM ROGERS
Jim Rogers:
Well, there is no question that retailers in Canada or Australia or
Brazil are going to be better than in other countries. Anybody in
a country which has an economy that is expanding is better off.
Peter Schiff;
Of course, all the earnings would be more valuable, from an
American perspective. The earnings are in a currency that is
appreciating relative to our own.
Jim Rogers:
Exactly. By the way, some of the countries like Brazil, Peru,
even Argentina, will be much better off than they were in the
past. However, when the commodity bull market comes to an
end in fifteen years or twenty years I wouldn’t bet that they
don’t go back into the same old problems. But that’s a long way
away.
Peter Schiff:
How do you deal with the cyclical concern that after 14 interest
rate increases the U.S. economy may slow down later in 2006
and into 2007. Would that have a significant downward effect on
commodity prices in the intermediate-term?
Jim Rogers:
I expect the U.S. to have a decline in the economy this year and
into next year. I don’t know how long the decline will last. We’ll
probably have a recession. It is probably going to have an effect
on some commodities, yes. But I would remind you, that there is
always correction in every bull market.
Peter Schiff:
And I think from the American perspective, one of the big
differences between this commodity cycle and the cycle in the
seventies, is that then America was the world’s leading industrial
economy: we manufactured everything. We had all the COMMODITIES, CHINA & GOLD 8 - EXCLUSIVE INTERVIEW WITH JIM ROGERS
machines, we had a trade surplus, and we had a current account
surplus. Now it’s the other way around. It’s Asia that is saving
and manufacturing and producing. They’ve got the factories and
the productivity and we’ve got no savings, a huge current
account and a huge trade deficit and all we do is run around and
service one another.
Jim Rogers:
We were an incredible nation in the seventies. We are now the
largest debtor nation the world has ever seen. There’s another
big difference. I don’t want you to think that there won’t be
corrections, or there won’t be consolidation. But for the most
part, it’s a secular bull market in commodities.
Peter Schiff:
Unfortunately, I think that Americans will feel the brunt of this
commodity bull market on their standard of living much more so
than they did in the 1970’s because of the underlying changes in
the economy.
Jim Rogers:
And the currency situation makes things much worse in this bull
market than it was in the seventies.
Peter Schiff:
Let me know if you agree with this observation that I have made.
We are now seeing financial assets and commodities rising at the
same time. I believe that it is not that everything is going up, but
that currencies are going down. So even stocks and other
financial assets appear to be rising, but what is really happening
is that financial assets are losing value relative to commodities.
Jim Rogers:
Yes, there is no question that there is no soundness to paper
currency anymore. There are some currencies that are sounder
than others, but essentially there are virtually no sound paper
currencies COMMODITIES, CHINA & GOLD 9 - EXCLUSIVE INTERVIEW WITH JIM ROGERS
Peter Schiff:
Which brings me to my next question: your outlook on gold?
You've always viewed gold differently from other commodities.
Why?
Jim Rogers:
The supply and demand dynamics for gold have been different
from other commodities for two or three decades. I own some
gold, but I’ve always tried to explain to people that they would
make more money in other commodities than they would in gold,
because of the supply and demand dynamics. Now that has been
true for the last decade or so. For lead, in fact, you would have
made a lot more money over the past thirty years, the past
twenty years, the past ten years, than you would have in gold.
But if you own gold, I still don’t expect to make as much in gold
as I would in things like corn and soy beans. But I own it.
Peter Schiff:
For a while the Goldman Sachs Raw Materials ETF was the only
commodity index fund available in that form. It has just been
joined by a cousin, the Deutsche Bank Commodity index fund.
More may join the party. Your thoughts?
Jim Rogers:
Now Merrill Lynch has a tracker fund based on my commodity
index, The Rogers Commodity Index. The Goldman ETF has very
serious flaws, as far as I am concerned. The Merrill Lynch Fund
is a wonderful product, because it is the only financial instrument
of which I am aware where you can get 100% long term capital
gains after six months.
Peter Schiff:
Do you expect to see many more of these types of commodity
funds? COMMODITIES, CHINA & GOLD 10 - EXCLUSIVE INTERVIEW WITH JIM ROGERS
Jim Rogers:
Of course. Right now there are over 7,000 mutual funds in which
the public can invest…there are fewer than 10 commodity funds.
By he end of the commodity bull market there will many more
commodity funds and products.
Peter Schiff:
Every good investment manager constantly asks him or herself:
"what would cause me to change my mind?" What would cause
you to change your mind on commodities?
Jim Rogers
If someone discovers a gigantic natural gas field in Spokane or
Chicago, or the largest oil field in the world in the middle of the
Atlantic, or a huge copper mine discovered in Tokyo, with easily
accessible product, of course it will have an effect. If there is a
dramatic increase in supply in a politically stable area, it will have
an impact on prices. But even if dramatic new supplies are found,
it takes years to bring them on stream.
And likewise, if something dramatic happens to demand, it will
have an effect on prices. But remember, even in bad economic
times like the thirties and forties, commodities did a whole lot
better than stocks and bonds – much, much better. And that
was because the supply/demand equation was out of balance,
like it is now. But, if we had some kind of devastation, of course,
everything is going to suffer, at least for a while. But with that
said, commodities from 1931 to 1953 were far, far, far and away
a better place to be than stocks and bonds.
Peter Schiff:
And they certainly were a better place to be, in a recent bear
market period, which was in the 1970’s.
Jim Rogers:
Exactly. COMMODITIES, CHINA & GOLD 11 - EXCLUSIVE INTERVIEW WITH JIM ROGERS
Peter Schiff:
Basically then in either under a highly inflationary period or a
recessionary period, you were better off holding commodities,
raw material, rather than financial assets.
Jim Rogers:
The basic situation is when supply and demand are out of whack
you are going to have a bull market. Whether it is inflation,
recession, or whatever, if supply and demand are out of whack,
prices will change. And they are seriously out of whack now and
getting worse
Peter Schiff:
If you look at supply and demand, the one thing that we know is
going to be in abundant supply is the U.S. dollar. And eventually
the demand for the greenback is going to drop significantly.
Because you cannot have huge demand for a currency that is so
aggressively created. You need scarcity. So the fall in the dollar
can be the biggest factor, from an American point of view,
propelling the U.S. dollar price of commodities higher.
Jim Rogers:
That’s the icing on the cake. You can have a decline in the dollar
and you wouldn’t necessarily have a bull market in commodities.
Supply and demand are still the most important factors. We now
we have supply and demand completely out of whack. These
other things, like the dollar and war, are all icing on the cake.
But the thing that has the biggest effect on commodity prices is
this gigantic supply/demand imbalance. And it is definitely worse.
Peter Schiff:
And it comes from years and years of neglect and underinvestment
in that area. And it is not going to change overnight.
Well thank you very much Jim. It is always a pleasure talking
with you, and I really appreciate the time you spent with us. I
am sure our newsletter readers will appreciate your insights.