Since the dot-com bubble popped we have seen a series of stories touting a hedge fund bubble, a housing bubble and now a commodity bubble.
Hedge fund guru Jim Rogers, whose 2004 book “Hot Commodities” trumpeted the commodity bull market, says recent claims that the downturn in commodity prices represent a bursting bubble are off base. Rogers is as bullish on commodities as ever and says talk of a commodity bubble show a complete lack of understanding of markets.
Rogers points out the Wall Street Journal only devotes a few paragraphs to commodities and notes that there are more than 70,000 mutual funds for the public to invest in stock and bonds but only a handful for commodities. “If this is a bubble, it is the strangest bubble I have ever seen,” Rogers says.
Bubbles are usually accompanied by multiple all-time highs. “Yes, some prices have gone up, zinc and copper for instance. But most commodities are far below their all-time high,” Rogers says. “It is a very strange bubble if only four or five of the whole universe of commodities are at an all-time high. People who talk about bubbles don’t know markets, don’t know history, haven’t done their homework on what the facts are.
“You notice that people who make those statements are not people who saw it coming but people who couldn’t even spell commodities a year ago, didn’t know what a commodity was two years ago and now all of a sudden they are making pronouncements as though they know something about it.”
What some analysts are responding to is the May correction in the metals sector, but Rogers says their analysis doesn’t address the fundamental underpinnings of why we entered a bull commodity market in the first place.
“Mines continue to deplete, oil fields continue to deplete. It is almost impossible to get engineers. It is almost impossible to get workers, to get tractors, to get production machinery,” Rogers says. “Speak to any CEO in the production business of metals or energy and even if they decided today to gear up, they can’t get the people, they can’t get the equipment. They can’t even get rail cars to move iron ore or agricultural products...nobody invested in production capacity for 20 years.”
Many people are uncomfortable trading futures and there are relatively few futures brokers compared to the multitude of securities brokers. That is changing and new products are being created to allow securities brokers to offer commodity products.
We have seen the creation of exchange traded funds for crude oil, gold and silver. Retail products benchmarked to various commodity indexes like the Goldman Sachs Commodity Index, The Dow Jones AIG Commodity Index and Rogers’ International Commodity Index (RICI) have become very popular. Dow Jones AIG is creating individual indexes on 20 commodities that will most likely be the benchmark for a whole new series of ETFs. On June 29 the Chicago Mercantile Exchange (CME) along with Merrill Lynch launched the Pimco Commodity Real Return DJ-AIG TRAKRS (pronounced “trackers”) product. On its launch, 17 million contracts traded, representing more than $424 million notional value of the product based on the Dow Jones AIG Commodity Index. TRAKRS are non traditional futures contracts, which are not leveraged for retail customers and can be held in a securities account. The CME and Merrill had previously launched a commodity TRAKRS, a Gold TRAKR and a TRAKR based on the RICI.
Rogers says futures are not nearly as risky as people think and commodities are easier to understand and analyze than stocks, but sees the creation of commodity based securities as positive.
“Whenever there is a bull market in anything, people try and figure out more ways to invest in it. It is the normal course of financial history; when you find a bull market people want to play and come up with new ways. You are going to see a lot more of those. I guess it makes it easier for some people; there are all those stock brokers out there who are not registered to trade commodities, who now call up their customers and say ‘lets buy oil through the ETF.’ They don’t have to register as commodity brokers to sell an oil ETF,” Rogers says.
Some analysts blame the long only funds for the spikes in many commodities particularly in energy. Critics say these indexes hoard commodities and are responsible for higher prices. While that is debatable as far as the indexes, some ETF products do actually hold commodities to back up the ETFs. While some see this as problematic, Rogers says supply-and-demand economics will regulate this.
“If silver goes up too much, I promise you the people [with] silver will dump it on the market. If there is too much oil in the world, the people with the oil are going to dump it on the heads of the speculators,” Rogers says. “Speculators can have an effect on the market for a while: a day, a week but not very long. Every day $6 trillion, with a T, worth of oil trades. All the hedge funds in the world, if they got together, could maybe affect the oil markets for about 20 minutes.”
While some ETFs do in fact take supply off of the market, that doesn’t change supply and demand, he says.
“If the price goes up too much, the people who got the stuff are going to dump it. You remember the 1970s when silver went to $50 [an ounce], everybody was melting down their coins, their tea services, because they couldn’t believe how high the price was. And it drove the price of silver from $50 to $4,” Rogers says.
The key to growth in new products will be the continuation of the bull commodity market. “As people realize more and more that is the place to be, more money will gravitate towards the commodity area and people will come up with ways to invest, whether it is ETFs, structured products or mutual funds,” Rogers says.
This is important because Rogers believes equities are headed lower.
“I expect the U.S. stock market to end down this year. I expect the U.S. to go into a recession or an economic slowdown later this year or next year.”
That is not to say that commodities are not vulnerable to a correction. Rogers points out several commodities had severe corrections in the last bull market as did equities during the 1980s and 1990s. “I would be much more worried about the stock market than the commodities market, but they both could go down. But if they do, stocks will go down more and stay down longer. In 2001 we had a big correction in commodities and in stocks caused by 9/11; commodities went down less and started going back up first. Stocks right now are very vulnerable and most people should be selling shares, at least in the West.”
He reminds us that prior to the bull stock market there were very few mutual funds; they were created because of the bull market. “That will happen with commodities as well.”
He expects the same growing pains and cyclical pattern with commodities as with equities. “We had a long bull market and we eventually had a bubble as we usually do when a bull market goes for a long time. Commodities will be in a bubble some day. 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?’”
Rogers joked that by the time all the so-called experts are firmly on board the commodity bandwagon, that will be the time to sell.
