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Natural
resources influence a significant portion of the world economy. They are the largest “non-financial” market in the world. Many studies indicate raw materials price movements are not
correlated to the price movements of financial instruments. This means a natural resource investment can provide important
portfolio diversification. Earnings
on a natural resource investment, despite a bear market, demonstrate the
merits of having raw materials diversification for most portfolios. Who knows what might happen if there were ever a bull market
in natural resources?!
Throughout
history, there have been bull markets in raw materials every 20-30 years. Supply and demand regularly get out of balance, leading to
recurring periods of rising (and declining) prices. Natural resources have been in a bear market for about 25 years now
(e.g. sugar peaked in 1973, oil in 1981, etc.). Declining markets attract
little in the way of increased productive capacity, and this bear market
is no different. Virtually no
one has built an offshore drilling rig, or opened a lead mine, or
developed a sugar plantation during this period. Quite the opposite - productive equipment has deteriorated, been
cannibalized, or scrapped while other capacity has closed.
Demand
has continued to increase during this period of static and declining
sources of supply. Prices
have declined because of inventory liquidation. The stockpiles built up because of the carry-over, hoarding
mentality, and the cold War have been liquidated leading to all-time low
inventories on a stocks/consumption basis. For example, the percentage ratio of foodstuffs inventories to
annual consumption reached records of about 35% in the 1980’s. The ratio is in the low teens now.
The
recent desperate raw materials dumping by the Russians, at a time when
Asia just stopped buying, has caused recent lows in many commodities.
These lows may last for years. We may be seeing long term double and triple bottoms even if the
world economy slows. Remember,
the 1970’s saw tremendous rises in raw material prices, despite economic
stagnation, as supply and demand corrected imbalances.
An
occasional argument against natural resource prices ever rising again is
“technology”. However, the world has had repeated dramatic
breakthroughs throughout history, yet these breakthroughs have not
prevented periodic, multiyear commodity bull markets. We have seen faster transportation, communication, and productive
advancements before in railroads, steam ships, radio, telephone,
electricity, planes, etc.. None kept prices down forever.
The
hydrocarbon industry of the 1960’s and 1970’s is a recent example. In the mid-1960’s, drilling below 5,000 feet or offshore was
almost impossible. An
explosion of technological advancements led to 25,000-foot wells and
offshore development world wide. The
Hughes diamond bit drill led to unthinkable drilling efficiency. Yet oil prices rose 1,500% in that fifteen year period.
The
Rogers International Commodities Index (RICI)* was designed to meet the
need for consistent investing in a broad-based international vehicle. Thirty-five commodities are represented in the
RICI. This gives it breadth just as the S & P 500 is broader than the
Dow Jones Industrials. International
commodities are represented, whereas most other indices are regional or
U.S.-oriented. For example,
other indices exclude rice, the staple food of a large percentage of the
world. All commodities in the RICI are publicly traded on recognized
exchanges to insure ease of tracking and verification. The RICI does not include non-traded items such as hides or tallow,
which are included in other popular indices.
The
RICI attempts to balance consumption patterns worldwide. One popular index has 19% in precious metals with only 6% in
hydrocarbons - the same weighting it gives orange juice. Another recently had as much as 63% in hydrocarbons, with only 37%
for everything else the world consumes. The RICI is designed to offer stability - partly because it is
broadly based and consistent in composition. Another popular index is changed dramatically every year, which
does little for continuity.
In
short, raw materials should always be represented in any diversified
portfolio. Stocks, bonds,
cash, and real estate do not provide sufficient representation of the
world’s economy, nor sufficient non-correlation to each other.
One
of history’s recurring raw materials bear markets may be currently
ending, as supply and demand become unbalanced due to economic shifts.
Raw materials inventories are now historically low. The RICI was organized to meet a need in the financial spectrum
currently not effectively covered.
© 2002 Jim Rogers
Also
see our FSO Resource Page
Jim Rogers
www.rogersrawmaterials.com
Tel: 800.775.9352
General Email
Also see The Millennium
Adventure on www.jimrogers.com
Ongoing articles
by Mr. Rogers
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Investment
Biker: Around the World With Jim Rogers
by Jim Rogers
Adams Media Corporation, 1995 (Paperback) |
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Investment
Biker: On The Road With Jim Rogers
by Jim Rogers
Random House, August 1994 (Hardcover) |
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Jim
Rogers became a Wall Street legend when he and George Soros founded
the Quantum Fund. This is the fascinating story of his 1990
investing trip around the world by motorcycle, with many tidbits of
hard-headed advice for investing in foreign markets.
From
Booklist
There's something about a motorcycle that seems
to arouse a rebellious freedom and maverick wanderlust. Accompanied
by a friend, Rogers, a successful mutual-fund manager who retired
before he turned 40 and continued to invest well on his own,
recently completed a 20-month, 51-country, 57,354-mile
around-the-world trek on a BMW bike. The result is this unique and
first-rate travelogue. Rogers provides fascinating sketches of the
people and places he visited, but in addition to--and sometimes in
spite of--the colorful scenery, he also notes the per capita income,
speculates on the future price of land, analyzes the local economy,
and uncovers opportunities to be exploited. Throughout, Rogers rails
against statism, preferring his economics like his travel:
unfettered and freewheeling. Tales of Rogers' trip have already
appeared in publications like Barron's and Town and
Country, so readers will be looking for this book. David
Rouse |
*The
material on this website has no regard to the specific investment
objectives, financial situation, or particular needs of any visitor. It is
published solely for informational purposes and is not to be construed as
a solicitation or an offer to buy or sell any securities or related
financial instruments. References made to third parties are based on
information obtained from sources believed to be reliable but are not
guaranteed as being accurate. Visitors should not regard it as a
substitute for the exercise of their own judgment. Any opinions expressed
in this site are subject to change without notice and Financial Sense is
not under any obligation to update or keep current the information
contained herein. PFS Group and its respective officers and associates or
clients may have an interest in the securities or derivatives of any
entities referred to in this material. In addition, PFS Group may make
purchases and/or sales as principal or agent. PFS Group accepts no
liability whatsoever for any loss or damage of any kind arising out of the
use of all or any part of this material. Our comments are an expression of
opinion. While we believe our statements to be true, they always depend on
the reliability of our own credible sources. We recommend that you consult
with a licensed, qualified investment advisor before making any investment
decisions.
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