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The Long-Run Commodity Bull Market

You'll never get rich by diversifying with stocks, bonds or Dollars, warns Jim Rogers...

THE COMMODITY BULL MARKET has a long way to go, said legendary investor and fund manager Jim Rogers at the recent Agora Financial Vancouver Summit.

   This bull market is not magic. It's not some crazy "cycle theory" I have. It does not fall out of the sky. It's supply and demand. It's simple stuff.

   In the 1980s and '90s, when people were calling you to buy mutual fund and stocks, no one called to say, "Let's invest in a sugar plantation instead." No one called and said, "Let's invest in a lead mine." Commodities were in a bear market and in a bear markets people do not invest in productive capacity. They never have. Perhaps they should have, but they've never done it throughout history and probably never will.

   So there has been only one lead mine opened in the world the last 25 years. There's been no major elephant oil fields [meaning more than one billion barrels] discovered in over 40 years. Many of you were not even born the last time the world discovered a huge elephant oil field.

   Think about all the elephant fields in the world that you know about. Alaskan oil fields are in decline; Mexican oil fields are in rapid decline; the North Sea is in decline. The UK has been exporting oil for 27 years now. Within the decade, the UK is going to be a major importer of oil again. Indonesia is a member of Opec. Opec stands for the Organization of Petroleum Exporting Countries...but Indonesia is going to get thrown out because they no longer export oil, they are now net importers of oil.

   Malaysia has been one of the great exporting countries in the world for decades. Within the decade, Malaysia is going to be importing oil. Ten years ago, China was one of the major exporters of oil, now they are the second largest importer of oil in the world.

   Oil fields deplete, mines depletes. This is the way the world's been working for a few thousand years and it will always work this way. So supply has been going down for 25 years. Meanwhile, you know what's happening to demand.

   Asia's been booming. There are three billion people in Asia. America's growing. Most of the world has been growing for the last 25 years. So supply has gone down and demand has gone up for 25 years. That's called a bull market.

   One of the things you'll find if you go back and do your research is that whenever stocks have done well, such as the 1980s and 90s, commodities have done badly. But conversely, you find that whenever commodities have done well, such as the 1970s, stocks have done poorly. I have a theory as to why this always works, but it doesn't matter about my theory. The fact is that it always works this way and it's working this way now.

   So before I set off to my second trip around the world, I came to the conclusion that the bear market in commodities was coming to and end. So I started a commodities index fund. This is an index fund. I do not manage it. It's a basket of commodities we put in the corner. If it goes up we make money; if it goes down we lose money. But since August 1st 1998, when the fund started, it is up 471%.

   I only mention this to show you that the commodity bull market is not something that will happen someday. It's in process right now, and it's going to go on for years to come, because supply and demand are out of balance. And by the time we get to the end of the bull market, commodities will go through the roof.

   There will be setbacks along the way. I don't know when or why, but I know they are coming, because markets always work that way. Commodities have done 15 times better than stocks in this decade and they're going to continue that trend.

   You remember my little girls. My 5-year old never owns stocks or bonds; she only owns commodities. She's very happy owning commodities. She doesn't care about stocks and bonds, but she knows about Gold. I assure you, she knows about Gold.

   Some of you probably diversify, or believe in diversification. I do not diversify; I am not a fan of diversification. This is something that stockbrokers came up with to protect themselves. But you're not ever going to get rich diversifying, I assure you. But if you do diversify, commodities are the best anchor because they are not going to do what the rest of your assets are going to do.

   I will give you one brief case study about oil, because it's one of the most important commodities. Some of you know that oil in Saudi Arabia is owned by a company called Aramco It was nationalized in the '70s. They threw out BP and Shell and Exxon. But the last Western company to leave did an audit of Saudi oil reserves and came to the conclusion that Saudi Arabia had 245 billion barrels of oil.

   Then in 1980, after 10 years, Saudi Arabia suddenly announced that it had 260 billion barrels of oil. Every year since 1988 – twenty years in a row – Saudi Arabia has announced, "We have 260 billion barrels of oil." It is the damndest thing.

   Twenty never goes up; it never goes down, and they have produced 67 billion barrel of oil in this period of time. When nuts like me look at Saudi, we ask, "How can this be? How can it be that they always have 260 billion barrel of oil?"

   (By the way, last year they said they have 261 billion barrel of oil.)

   And the Saudis say, "You either believe us or you don't," and that's the end of the conversation.

   I have never been to the Saudi oil fields, and even if I had, I wouldn't know what I was looking at. But I do know something is wrong. I know that every oil country in the world has a reserve problem, except Saudi Arabia of course. I know that every oil company in the world has declining reserves. So I know that unless someone discovers a lot of oil quickly, the surprise to most people is going to be how high the price of oil stays and how high it goes eventually.

   That is the supply side. Let's look at the demand side.

   The Indians use just 120th as much oil as their neighbors in Japan and Korea. The Chinese use one-tenth as much per capita. There are 2.3 billion people in India and China alone. And, well, the Indians are going to get more electricity. The Indians are going to get motor scooters. They are going to start using more energy. So are the Chinese.

But if the Indians just doubled the amount of oil used per capita, they would still use only one-tenth of what the Koreans use. If the Chinese doubled their oil use, they would still be using only one-fifth what the Japanese and the Koreans are using. So you can see what kind of pressures there are on the demand side for oil and energy, at a time of terrible stress on the supply side.

   These are simple things. So I would urge you are to take a lesson from my little girls. My little girls are learning Chinese. My little girls are getting out of the US Dollar. My little girls own a lot of commodities. I would urge you to do the same.

Eric J.Fry has been a specialist in international equities since the early 1980s. A professional portfolio manager for more than 10 years, he wrote the first comprehensive guide to American Depositary Receipts, International Investing with ADRs. Today he reports on Wall Street from California for the renowned Daily Reckoning email service.

See full archive of Eric Fry articles

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