As late as 1999, oil was trading at $10 per barrel and gold at $250 per ounce, down from their nominal peaks in 1980 of $39 and $850 respectively. And that’s not even adjusted for the fact that the value of a dollar was a lot lower in 1999 than in 1980.
Many pundits at the time argued that prices would continue to go down. The Economist had a cover in March 1999 entitled “Drowning in Oil” where it argued that oil would continue to fall well below $10 per oil. And gold was of course deemed a barbarous relic which would continue to fall in price as central banks continued to dump it.
That forecast from The Economist turned out to be one of the worst in economic history — on a par with Irving Fisher’s stock-market forecast in 1929 — because just a few weeks later the price of oil started a new upward trend. As this article is written, gold is trading at over $800 and oil at $95. FULL ARTICLE
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So, to summarize, a commodity fund manager thinks I should invest in commodities while they’re at a historic peak, based on a market-timing strategy, because of a long-term price-cycle theory, which is described in a new book he wrote and in his newsletter.
I lost count of how many red flags went up.
The Federal Reserve has doubled the amount of money since 2000. That is a growth rate of 10% distributed unequally, read foreign provided goods and services like OIL, COPPER, GOLD, etc, among all products in the economy. This is not worth mentioning against the real reason, time lags and bureaucracy in production. I find this hard to believe. There is no way that the demand has pushed up prices for these commodities to these levels.
This is especially true for gold as it has limited uses compared to oil, natural gas, copper, etc.
To be fair, Rogers’ book was published several years ago. It may be just coming out in paperbook?
The book was published in 2005, so Jimmy Rogers probably wrote most of it in 2004, when oil price was in the $30′s an $40′s. Rogers has certainly proved himself correct, as both commodities and Chinese stock market have more or less trippled since then. The key question here is going forward from here . . . well, don’t we all wish to know that for sure
The timing is the problem. Commodities have gone up, and probaby will continue to go up, but for how long?
Commodities are an underappreciated and underutilized diversification investment for most portfolios. Cashing out of equities entirely to put everything into commodities (or any other single-sector investment) is only for those who like the probabilities of surviving cordless bungee-jumping.
My comments:
The commodities comments above give one pause in believing Roger’s projections. However, I should think that the gold comments that Rogers left out and that Karlsson added are the important points here. That being said Rogers does think that gold will go much higher. (See various Youtube interviews with Rogers in the last month.)
Rogers further states that one should not be in the Euro, rupee, ruble, or the dollar, because their countries are lowering interest rates. And that one should be in the yuan, yen or Swiss franc if one has dollars. All primarily because Bernanke is not being serious about inflation and is lowering the interest rates. And because our methods of calculating core inflation, the method that determined that inflation for social security was only 2.8% this year, are seriously flawed.
The core inflation rate leaves out energy and food because they are too volatile AND INCLUDES housing costs (which are not volatile!?!?) which have dropped 20-30% in many major markets over the last year!! A very strange formula in today’s world. It is not clear to me what it is that core inflation is really calculating. From the last Fed Reserve meeting minutes, they are using these low inflation numbers to justify lowering interest rates to save the banks and investors who lent money to high risk folks and to avoid a recession. They will likely use the same logic in December. This will further undermine the world’s view of the dollar’s strength and increase the price of gold.
Interesting times.
Jim Rogers actually has a new book coming out around December 4th about China.
This isn’t a good time to get into commodities. Their prices may increase a little over the next few years, but we have missed the real opportunity to make money from them. Smart investors got into commodities before the 2000 collapse of the stock market. I’m not bullish on commodities at this point because Ben can’t increase the money supply for ever. He has a great deal of confidence in the Fed’s ability to control the economy, but history should cause him to be a little more humble. The shift in commodity prices beginning in 2000 was the beginning of the downturn in the business cycle, per Austrian econ. The housing collapse is just the downpayment. The economy will continue to contract no matter what Ben does with the money supply. But if he keeps pumping it up, we’ll have stagflation next year. At some point he’ll be forced to raise interest rates.
Why is Ron Pal the only one running for president that gets it?
http://www.ronpaul08.com
Fundamentalist,
It takes time for the effects of inflation to fully realize. If the total outstanding credit issued by the FED were frozen forever today, prices would still continue to rise for some time after. How long after is anybody’s guess at this point, but I don’t think we’ve yet begun to pay for that incredible credit expansion from back in September.
At some point the dollar will collapse into oblivion. On that day, you return to barter, before we could possibly regenerate a commodity money. Only commodities will have any values. Unfortunately, these commodities will be physical, not instrumental.
I’m morbidly curious to see how it will happen.
Jim, yes , the book was originally published in 2004. But a new and updated version was published in September 2007. And that’s the one I read and reviewed. References to facts have been updated in all cases where facts have changed, so it is for all practical purposes a new book.
Person. I’ve already dealt with the bias issue. And if you have any factual argument against Rogers cycle theory, which was described in the article, let me know.
Fundamentalist. Yes, someone who bought commodities in 2000 would have been better of than someone buying now. But someone buying now is still likely to achieve high returns for the coming years.
And the problem is that all the alternatives are unattractive. Stocks are overvalued, house prices will continue to fall for a while and bond yields are pathetically low -indeed, negative in real terms.
Jaq: “It takes time for the effects of inflation to fully realize.”
Yes, the lag is generally about 18 months. But the effects of previous inflation can cause the business cycle to crash long before the central bank stops inflating. I’m thinking that the initial inflation sets in motion changes in the real economy that later levels of inflation can’t reverse. I don’t believe that inflating the money supply always rescues the economy temporarily. Greenspan referred to the impotence of the Fed at certain points in the business cycle and called it “pushing on a string.” The rise in commodity prices was the first sign. The collapse in housing the second. I think a stock market crash and higher unemployment will follow soon, regardless of what the Fed does. At this point in the cycle, the economy is out of range of the Fed’s control.
Stefan: “But someone buying now is still likely to achieve high returns for the coming years.”
Forecasting is tricky, particularly when forecasting the future. I’m thinking that at this point in the cycle, interest rates will rise on their own regardless of what the Fed does and prices will moderate; some will collapse. If nothing else, inflation will force Ben to raise his rates. He will have to live with the higher unemployment. You’re right that there are no good investment options right now. So we should stay in cash a little longer. Or for those brave enough, go short on commodities. Real estate may have hit bottom and this would be a good time to get in, but there’s no hurry. It won’t rebound soon.
Hi Austrian folks worldwide,
Down here in Brazil we should pray everyday for the US Dollar’s health…
If (or rather when, if I’ve correctly understood the context) the American economy implodes, I just figure out the domino effect it will produce here as well as in many other countries that rely and save on USD.
RHU, Mech. Engineer, Rio de Janeiro.
rhu: “…the domino effect it will produce here as well as in many other countries that rely and save on USD.”
rhu: “..the domino effect it will produce here as well as in many other countries that rely and save on USD.”
Sorry, I hit the wrong button and caused the post above to be cut short.
You’re right. Should the US get into higher inflation, it will produce higher inflation in those countries that use the US$ as a reserve currency. But should the US$ climb suddenly, it will cause a contraction of reserves and a contraction of the money supply, leading to recession. The next few years will be rough for us all, but much more so for poor countries.
The United States Dollar is rock solid. The U.S. mint strikes millions of new silver and gold coins every year. Also, there are millions of U.S. silver and gold coins left over from the 1800′s and early 1900′s. If the paper dollar ever loses all of its value, there are plenty of silver dollars, gold dollars and five, ten, and twenty dollar gold pieces to go around for Americans, and many more new ones can be minted.
Therefore, don’t worry about the dollars collapse in value. Unless you have no U.S. silver and gold coins when that day arrives. Although the collapse of paper money probably will not happen until welfare programs like Social Security, and Medicare go broke, and cause most people to lose their faith in government.
As a measure of protection, it is wise to buy at least a few silver and gold coins even though they are often expensive. However, if the dollar does go to zero, it would be a very good thing to own some United States silver and gold coins already.
I would also like to say that I disagree with Jim Rogers statement that it is better to own commodities themselves rather than commodity stocks.
For example, gas and oil stocks such as Ultra Petroleum, Valero, Southwestern, Chesapeake, Encana, and many others have had much higher returns than owning the commodity itself.
“So, to summarize, a commodity fund manager thinks I should invest in commodities while they’re at a historic peak, based on a market-timing strategy, because of a long-term price-cycle theory, which is described in a new book he wrote and in his newsletter.
I lost count of how many red flags went up.”
You’re not counting the green flags.
- Rogers is not selling his commodities, nor his daughters’.
- Gold production is still below 2001-2004 peak. Inflation is affecting production costs for gold miners – meaning gold mining is barely paying for itself. This is an indication that the sector is under-capitalized. This sector got hit super hard in the 1996 reinflation after the 1995 recession (which thanks to the political NBER has also disappeared into the memory hole)
- The historic peak is only in nominal terms, even adjusted for fake government CPI, gold reached ~$2000 in 1980 in today’s prices – another indication that we’ve got a long way to go.
- The general rule for good investing is buying low and selling high – yet you’d be surprised how few actually do that. “Hot Commodities” would have disappeared into the memory hole if it was published in 2000, as many people don’t heed advice early, but rather jump on the bandwagon when some decent price movement has been established.
- We are in RECESSION and have been so since 2006Q4, although I suspect that the NBER will not date that, but will probably start it early 2007Q3 . Either way the prognosis for gold is up.
Do you want to be one of those suckers that sold gold off in ’74-’76 (even though it was legalized), and miss out on the upward spike?
I think not. The fundamentals for gold price rise are clearly there.
Load up and buy the dips. It’s the best game in town – almost all other investments pale in comparison. This is a hard-assets-over-financial-promises cycle.
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