iTulip.com’s President Eric Janszen interviewed investor
James Rogers to hear what Rogers thinks of Warren Buffett’s
comments to annual Berkshire Hathaway shareholders Saturday on
commodities and to get an update on the progress of what he views as
the early stages of a long term bull market in commodities.
Warren Buffett mentioned at the shareholders meeting Saturday that, "We
had a lot of silver at one time, but we don't have it now."
He noted, "something like copper is speculative on both sides of the
market--you are looking at market that's responding more to speculative
than fundamental forces." Buffett believes the price rise in
at least these two commodities are the result of speculation not
fundamental supply and demand, and he implies that commodities are in a
speculative phase generally.
Rogers has been frequently featured in Time, The Washington Post, The
New York Times, Barron’s, Forbes, Fortune, The Wall Street
Journal, The Financial Times, and most publications dealing with the
economy or finance. He has also appeared as a regular
commentator and columnist in various media and has been a visiting
professor at Columbia University.
Brief biography: Jim Rogers started his career as an investor with
Arnhold and S. Bleichroeder in the early 1970s. Rogers
co-founded the Quantum Fund, a global-investment partnership.
During the next 10 years, the portfolio gained more than 4000%, while
the S&P rose less than 50%. Rogers then decided to
retire – at age 37. However, he didn’t
stay idle. While he continued to manage his own portfolio,
Rogers served as a professor of finance at the Columbia University
Graduate School of Business. In 1989 and 1990, moderated
WCBS’s “The Dreyfus Roundtable” and
FNN’s “The Profit Motive with Jim
Rogers.” At the same time, he was laying the
groundwork for an around-the-world motorcycle trip.
In 1990-1992, Rogers fulfilled his lifelong dream: with a companion
motorcycling 65,065 miles across six continents, a feat that landed
them in the Guinness Book of World Records. As a private
investor, he constantly analyzed the countries through which he
traveled for investment ideas. He chronicled his
one-of-a-kind journey in Investment Biker: On the Road with Jim
Rogers. His latest book, published in 2004, is Hot Commodities,
How Anyone Can Invest Profitably in the World’s Best Market.
time iTulip.com readers dodged the Internet Bubble and Real Estate
bubble bullets and purchased some gold back in 2001 when we pointed out
that it was trading at 13% of its inflation-adjusted peak
price. Since then we’ve seen significant gains in
precious metals. Warren Buffett mentioned at the annual
Berkshire Hathaway shareholders meeting Saturday that, "We had a lot of
silver at one time, but we don't have it now." He noted,
"something like copper is speculative on both sides of the market--you
are looking at market that's responding more to speculative than
fundamental forces." Buffett believes the price rise in at
least these two commodities are the result of speculation not
fundamental supply and demand, but he implies that commodities are in a
speculative phase generally. Do you agree?
copper prices may have been influenced by hedge funds and other
investment pools as has silver. Both have gone up in price
very quickly over a short period of time, and that does suggest
speculative activity. But it’s important to keep in
mind that silver, for example, in spite of these gains is still trading
at 25% of its inflation-adjusted peak price. It may be
accurate to say recent gains have been driven by speculation but I
disagree that fundamentals will not drive prices of these commodities
higher in the long term, over the next ten years or so. The
supply and demand factors and historical peak prices tell me that they
have to go much higher before they can be declared speculative
markets. That will happen eventually, that that phase is a
long way off.
hedge funds and other investment pools control these markets and make
them risky to invest in?
can try, but in the long run attempts to manipulate commodities prices
always fail. Take oil, for example. Six trillion
($6,000,000,000,000) of oil trades every day. Not even
governments can control those kinds of capital flows, not for
long. That goes for currencies, too. Short term,
yes they can be manipulated. But eventually market forces
take over, and the supply-demand market forces for oil long term will
drive prices up. Governments can try to support the dollar,
for example, but in the long run these efforts will eventually fail.
there other commodities that have not been the focus of speculation
that are a better bet today than copper or precious metals because they
are cheaper and haven’t gotten the attention of hedge funds?
Sure. Sugar is trading 80% below its high, and corn and wheat
60% below their peak prices. And that’s without
adjusting for inflation. Do that, and they’re
trading at around 5% of their peak prices. That’s
cheap! They have a lot of upside.
How about oil? Many say that oil is now in a bubble phase
because it’s increased from $10 per barrel in 1999 to $70 a
If the fundamentals for increased prices remain, prices will continue
to rise. Show me where major new sources of oil supply are going to
come from and I’ll buy the idea that oil is going to decline
in price long term.
That covers the supply side of the oil equation. What about
demand? The US economy looks to be headed toward a crisis as
housing prices decline, something we have been warning our readers
about since 2002, and the dollar declines as foreign creditors pull in
their horns and stop lending us the money we need to buy their
exports. We’ll see inflation, rising interest rates
and likely recession, not just for the US but for the world.
Won’t a slowdown in the world economy lower demand for oil
and cause the price to decline?
That’s not how it works. During a time when many of
the world’s largest economies were in recession in the 1970s, oil prices increased several fold. The UK
went bankrupt during that period and had to be baled out by the
IMF. But oil and commodity prices boomed. Another
major boom in commodities started during the depths of the Great
Depression, in 1933, during what was arguably the worst collapse in
global demand in history. Global trade fell more than 50%.
I bought your book Hot Commodities at the book store versus online
because I wanted to see what book stores are putting on their shelves
in the personal investing section. That’s a good
indicator of what the bookstore thinks consumers want. The
shelves are full of books about mutual funds, stock index funds and
getting out of debt. There seem to be fewer get rich quick in
real estate books, but the only book I could find on commodities
investing was yours. Why so little interest in commodities if
we’re in a bull market?
in the early stages of a commodities bull market. Until 2001,
commodities had been declining in price for decades while stocks went
up. Over that period of time, an entire industry has
developed to create, market and sell stock related products.
Not surprisingly, the bookstores are appealing to the same consumers
targeted by the companies that sell stocks related products, such as
mutual funds to index funds, for decades. The market for
these products has developed to the point where there are now 70,000
stock mutual funds and ten – count them, ten! -- commodities
funds. That means an entire industry, from the traders to the
book authors, has to develop to create, market and sell commodity
Most people I talk to either don’t understand or simply
don’t like commodities. They think pork bellies and
cows, silos of grain. Commodities are unfamiliar.
Then there are the people who simply don’t like what
commodities represent – destruction of the environment, not
to mention what appears to be unproductive economic activity.
When they think of stocks, they think of innovation, technology, wealth
creation through human activity. Cool new cell phones,
Internet based media, exciting new technologies that improve
productivity and expand the economy. These are positive and
exciting things. They also like houses.
They are status symbols. The kids run around in
them. Your home is your castle and all
that. Houses are nice. Commodities are dirt and
arsenic and trucks ripping up the earth and cutting down trees, smoke
stacks spewing pollutants, stinky pig farms. Do commodities
have an image problem?
This is all understandable and part of what has made commodities such a
great investment opportunity: irrational investor behavior.
Fact is, without commodities the world cannot function, and markets
don’t care if you like an asset or not. These
things go through cycles. The average investor is more
interested in how cool a company or technology is than in the
fundamentals of the business. Mostly they’re
following price, which eventually leads to hysteria at the top of
bubbles as your site pointed out during the Internet bubble and housing
bubble. Some day the shelves will be full of books
Then it will be time to start thinking about shifting out of
commodities and into stocks?
Have the emergence of Exchange Traded Funds (EFTs) and Commodities
Index Funds like your Rogers International Commodity Index (RICI) make commodities investing
more accessible to investors who are used to buying stock mutual funds
or index funds from their brokerage account?
It’s true that a portion of the rise in some commodities such
as gold and silver is related to the fact that to invest in these you
don’t have to go buy bullion anymore but can buy shares in an
EFT from any brokerage account. This makes the process more
familiar and the concept of buying shares in an index is more intuitive
for the average person who is used to buying shares of stock in a company
or a mutual fund. But buying commodities directly is also
trivial and I explain how to do it in my book.
Why not buy stocks in companies that produce commodities, such as
mining stocks, or a mutual fund that’s composed of stocks in
There is a lot of research that shows that over time stocks in
companies that produce commodities always under-perform the commodities
themselves. This is mostly due to the way these companies are
managed. Most are not managed well, and no one has been able
to consistently guess which ones will be well managed and which ones
poorly, so it’s very hard to make money in commodities based
During this commodities boom, stocks can be expected to decline,
Yes. They tend to be inversely correlated. The
fundamentals that drive up commodities prices are not good for
stocks. Rising commodities prices increase the input costs
for companies in many industries, from housing to consumer
goods. More expensive oil, for example, eventually shows up
in the cost of making goods that contain a lot of plastic, so profits
get squeezed as manufacturers are reluctant to pass these additional
costs onto consumers, who will buy less product if prices are raised to
You mention in your book that oil, gold and other commodity prices
collapsed between 1980 and 1982. You attribute this to the
fact the rising oil and gold prices in the early 1970s motivated
exploration and that by 1978 world oil supply was greater than demand
for the first time in many years. This started to impact oil
prices in 1980. But didn’t Fed Chairman Paul
Volcker’s policies to kill inflation with Fed funds rate
hikes up to 19% in 1982, and the on and off three year recession that
produced in the US cause this collapse in commodity prices?
Inflation declined from an average of 18% in 1980 to -.04% in
1983. Surely that had a big impact on demand and thus prices?
certainly deserves a lot of credit but the market was well on
its way to solving the oil price problem on its own. The
government was having to print a lot of money to pay for the war in
Vietnam as well as to pay for oil that was in short supply relative to
demand, and this during recessions, mind you. So for oil, the
inflation was caused by a supply-demand imbalance. For gold,
the price that peaked at $870 in 1980 (around $2000 in current dollars)
was driven by investors’ expectations of future
inflation. In investors’ experience, inflation is
all mixed together, the kind created by a shortage of oil relative to
supply and the kind created by the government to finance a
war. Even after the printing to pay for the war and other
government spending was reduced, inflationary expectations were built
into contracts and people’s expectations
generally. This is the inflation that Volcker attacked and
did so successfully.
So gold went down because of Volcker and high interest rates and oil
went down because of increased supply and also high interest rates.
In other words, it's best to think of commodites themslves as
money, whether it's oil or gold or wheat.
Janszen: Where does that leave us with gold and other precious metals
today? You mention in your book that 75% of all money going
into exploration is going into gold mining. That certainly
doesn’t bode well for the supply side of the gold price
equation. How about the demand side?
Don’t get me wrong. I own both gold and
silver. But it’s not an investment in commodities
like wheat, sugar or corn. Gold and silver are insurance
against the kind of inflation that Volcker was fighting in the early
1980s and currency related risk. If things go haywire for the
dollar and currencies generally, demand for gold and silver will go
through the roof. So everyone should have some, as
insurance. But keep in mind if the world really gets into
trouble, the demand for wheat and corn will be even higher, so their
price is likely to increase even more. Gold and silver
investors need to expand their horizons with respect to covering these
kinds of risks.
You mention in your book that several set backs are likely during this
long term bull market in commodities and mention China as a prime
candidate, due to classic hyper-growth capital over investment and poor
banking system controls; China’s likely to blow up at some
point, sooner or later. What about the US economy and the
dollar? The US is not exactly the poster child for balanced
trade and sound fiscal policy.
The US economy is on the road to disaster and the dollar along with
it. Another reason to invest in commodities is to hedge the
risk of a major decline in the dollar, such as by investing in raw
materials produced by countries like Canada. There you get
the double benefit of both the appreciation in prices of commodities
Canada produces and an appreciation in the Canadian dollar relative the
I really enjoyed speaking with you again.
My pleasure. Anytime.
Discuss this interview...
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