Commodities

I recently read Hot Commodities : How Anyone Can Invest Profitably in the World's Best Market by Jim Rogers. In his book, he makes a compelling bullish argument for commodities. To a large extent Jim Rogers bases his view that every thirty years or so there is a bull market in commodities that lasts for fifteen to twenty years. Supply and demand patterns change, which allows for a new bull market to emerge. In the 1980s and 1990s, we saw a bear market in commodities. The bear market led to an underinvestment in commodities related business, with the consequent lack of sufficient growth in productive capacity. As Asian economies, particularly China's, have gathered momentum, they have become voracious consumers of commodities. The necessary factors have set in motion another commodities bull market.

For investors, we note that commodities show a negative correlation with stocks and bonds. Commodities are liquid and are easily traded. Unlike stocks and bonds, commodities have no credit risk. And unlike stocks and bonds, commodities can't go to zero. Commodities are real assets that have generally outpeformed inflation. Moreover, commodities offer excellent portfolio diversification benefits.

For those who read and enjoyed Investment Biker : On the Road with Jim Rogers or Adventure Capitalist: The Ultimate Road Trip, you'll enjoy his latest book as well. He writes in the same style and he does draw upon his earlier experiences as he discusses commodities.

In this weekend's Barron's Magazine Sandra Ward interviews Ray Dalio, Chief Investment Officer, Bridgewater Associates, in an article Bipolar Disorder (subscription required). Paraphrasing Barron's, Dalio runs nearly $120 billion in institutional assets and his hedge fund has provided consistent returns of about 15%, after fees, on average, every year for nearly 16 years running. That's impressive.

Dalio supports Rogers' assertions that commodities will continue to be a strong asset class. He cites that world economies are late in the economic cycle and that there is a surplus of labor and a shortage of commodities. China and other emerging economies are growing and buying U.S. bonds. As long as China continues to grow rapidly, which seems very likely, there will continue to be strong commodity pressure as the rest of world benefits from lower cost goods. These are the same arguments that Rogers has been making for some time.

Another good source of information concerning the markets and commodities is Fleckenstein Capital website. Bill Fleckenstein is extraordinarily bullish on commodities and expresses the same and other concerns mentioned by Rogers and Dalio.

Rogers makes a compelling case why investors should have some capital allocated to commodities. If you don't own any commodities or commodities related stocks, you should purchase Jim Roger's book "Hot Commodities" to learn more about commodities. His book is not technical nor difficult. Rather, Rogers provides a fundamental basis for you to do your own research as you learn more about commodities before making your investments.