FM: The most recent estimate of money invested in long-only commodity funds is $90 billion. Many analysts claim these funds are behind spikes in energy and metals. Will long-only funds begin to distort market?
R: Commodities markets are the second most liquid in the world after foreign exchange. I am not worried about investors coming into the market; $6 trillion [trades] everyday in oil alone. The oil market alone is bigger than all the stock markets in the world put together. Rice too, half the people in the world eat rice every day. There is a gigantic rice market out there. Yes, there will be more investors coming in but that has happened throughout history. In 1980, there were virtually no mutual funds in Europe and very few in the United States, now we have over 70,000 mutual funds in the world for the public to invest in stock and bonds; that had an affect on the stock market but most of them came because the market went up. Mutual funds didn’t just pop into existence and therefore the market went up, the market went up and as the market went up it made people get interested, more people bough mutual funds, it was a self reinforcing process. That will happen with commodities as well but listen, commodities are much more liquid, much bigger markets than all the stock markets in the world put together.
Yes new investors will have an affect but remember we had gigantic new investments in stocks and bonds with mutual funds hedge funds etc., somehow the world survived and somehow we had a long bull market and we eventually has a bubble as we usually do when a bull market goes for a long time. Commodities will be in a bubble some day, there is no question about that but it is a long, long way from that. You call me up in 2019, and I am sure I am going to say ‘please sell your commodities,’ and you will say, ‘don’t you know commodities always go up.’
FM: Have the long-only funds caused the cantango situation in crude oil?
R: I don’t know. Cantango and backwardation come and go in my experience. I have seen cantango and backwardation many times in all these markets but I don’t know.
Maybe the new funds are having an affect but again if they are, the markets are going to adapt because the people with the copper or the wheat or the corn or the oil are going to figure out opportunities and come to the market and the market will have to adapt again as it always has.
FM: While you are as bullish on commodities as ever, you have always cautioned that there will be correction — some major — along the way.
R: Sure oil could go down to $40. It could go lower if bird flu wipes out Europe or attacks Italy or something; everything is going to collapse, stock too. If that happens, commodities are going to go down less and will be the first thing to go back up.
FM: With some commodity sectors like energy and metals seeing huge spikes, do people need to hedge more of their commodity exposure?
R: I am a horrible trader, horrible market timer. In my index agricultural products are 35% of the index, you can conceivably have agriculture going up a lot because most of those (markets) are depressed and the fundamentals are changing, so what you should hedge I don’t have a clue, I will leave that to you and your smart readers.
FM: Other indexes have higher concentrations in specific sectors. The Goldman Sachs Commodity Index (GSCI), for example, has always been heavily weighted towards energy.
R: The [GSCI] is 77% energy. If one is long the GSCI one better be aware of that. Which will correct and when I don’t know. Sugar in the last bull market corrected 80% and then it went up 600%. That is the kind of thing that happens in bull markets when things start correcting. Stock in the bull market in the ‘80s and ‘90s had huge corrections.
If people are going to be investing, I hope they understand the makeup of what they are investing in. If you invest in the S&P 500, I hope that you know what is in the S&P 500. You don’t just buy it blind so you can figure out the corrections when it comes. When you look at the English stock market index (FTSE) it is heavily influenced by energy and mining. If you didn’t know that, if you just thought it was a broad brush of the economy, you might get whipsawed on the upside or the downside. I hope people look at what they are investing in.