Why Raw Materials?
Jim Rogers (written in 2002)
Rogers Forum Discussion
Topics in the Jim Rogers Forum Discussion include, but not limited to:
International Commodity Index
as well as Commodity Funds
Rogers Raw Materials Fund,
Pimco Commodity Real
Return Fund, and
Jim Rogers' New Book:
Hot Commodities: How Anyone Can Invest Profitably in the World's Best Market
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 Rogers Commodity Index. 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 Rogers International Commodity Index are publicly traded on recognized
exchanges to insure ease of tracking and verification. The Rogers International
Commodity Index does not include
non-traded items such as hides or tallow, which are included in other popular
The Rogers International Commodities Index 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 Rogers International
Commodities Index 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
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
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 Rogers Commodity Index was organized to meet a need in
the financial spectrum currently not effectively covered.
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