Old Soros Partner Thinks Commodities are the way to go

[DesertCat]

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Name a commodity that hasn't over the last twenty five years.


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Olive oil and some types of lumber, for starters. But with that said, 1980 is a bad starting point because of high inflation and high commodity prices (relative to a few years later). I suspect Julian was well aware of this when he made his famous bet. If you start in 1982-1983 and try to name commodities that have outpaced inflation, there are quite a few.

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I'm pretty sure Julian made his arguments based on data that goes back hundreds of years. The argument is essentially that in general humanity gets wealthier over time, and that means commodities get more affordable, i.e the definition of wealth is that prices lag income gains.

Certainly commodities can increase in price dramatically in short periods, but over long periods the arrow points down. Even in the case of commodities such as oil, where we are within 50-100 years of exhausting currently known supplies.

I cherry picked a little in using oil, since 1980 was an all time high for oil prices. But right now we are at a 25 year high in prices as well so I thought it was still fair. Shifting back five years, from 1975-2000 would produce similar results, since oil prices were dramatically lower in 2000.

I can't find historical data on olive oil prices, or any types of woods that support your assertions. Can you point me to public data on any commodities that do?

[laserboy]

There is no fee to look at the article, you can just click on the PDF file at the bottom of the page. [img]/images/graemlins/grin.gif[/img]

Here is the summary:

1) Between July 1959 and March 2004 average monthly returns on the S&P 500 and equally weighted commodity futures were remarkably similar at 10.8%, and 10.5%, respectively.

***Commodities have outperformed everything since then

2) They are also similar over economic expansions with 12.8% returns for the S&P 500 and 12.9% on equally weighted commodity futures.

3) During late stages of expansion when stock and bond returns are below average commodity returns are positive and outperform both stocks and bonds.

4) During the early stages of recession stocks, bonds and commodity returns are negative -15.5% and -2.9% respectively. By comparison the returns on commodity are positive by 3.5%.

They somehow came up with 1959-2004 as encompassing exactly 7 business cycles.

I highly recommend Rogers' books though. Even if you aren't into investing, his books are very entertaining. Particularly Investment Biker and Adventure Capitalist. Warren Buffett once called Rogers the finest Securities Analysis professor in the country.

Interesting facts:

Did you know that only one lead mine has been opened in the world in the last 25 years?

Or that over the past couple of decades Columbians have been tearing out their coffee trees to plant coca plants, the source of cocaine?

Or that with sugar prices at record lows and oil prices at record highs that sugar can be profitably converted into gasahol?

[OrangeCat]

Take your spam someplace else.

[DesertCat]

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I highly recommend Rogers' books though. Even if you aren't into investing, his books are very entertaining. Particularly Investment Biker and Adventure Capitalist. Warren Buffett once called Rogers the finest Securities Analysis professor in the country.

Interesting facts:

Did you know that only one lead mine has been opened in the world in the last 25 years?

Or that over the past couple of decades Columbians have been tearing out their coffee trees to plant coca plants, the source of cocaine?

Or that with sugar prices at record lows and oil prices at record highs that sugar can be profitably converted into gasahol?

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I like Jim Rogers, he was a hell of a security analyst. But I think he's gotten a little nutty over commodities.

The facts you cite support that commodity prices decline over time. We get more efficient at pulling them out of existing mines, or farming certain crops gets so efficient farmers are forced to look for other opportunities.

And world sugar prices have gotten really cheap. I'm pretty sure the U.S. doesn't benefit from low world sugar prices, because our tariff system keeps domestic prices high.

Our prices for imported commodities are rising due to our huge budget deficits driving the dollar lower. That's a big reason why oil is $56 a barrel, if the Euro was still worth 86 cents U.S. oil prices would probably be about 30% lower.

[DWarrior]

I'm sure this is put much better by the experts, but isn't the reason for commodities' long term trend (really long term), is that we can assume newer commodities will be invented?

For example, once new source of fuel becomes available, oil prices will plumet.

That's really long-term though.

[laserboy]

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The facts you cite support that commodity prices decline over time. We get more efficient at pulling them out of existing mines, or farming certain crops gets so efficient farmers are forced to look for other opportunities.


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Unfortunately, that is not the way things have worked out. Global inventories of industrial metals like lead, copper, and silver have been on the decline for years and are nearing depletion. World coffee supply is now outpaced by demand. That is what happens when you don't open any new lead mines for 25 years. The fact that no one has invested the time or money into new lead mines is because prices have been too low for them to be profitable. Meanwhile demand is being exacerbated by the industrialization of China. There are billions of people in Asia, many times the population of the United States, that do not yet drive cars (one of lead's main industrial uses is as a component of car batteries) or eat processed foods. This is changing rapidly as industrialization and wealth continue to flow into the country. When supply goes down and demand goes up, the price of a commodity will eventually go up. It is that simple.

There is a reason why when the average joe is buying shares of Google and Sirius, guys like George Soros are buying shares of distressed lead battery recyclers...

[laserboy]

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I'm sure this is put much better by the experts, but isn't the reason for commodities' long term trend (really long term), is that we can assume newer commodities will be invented?


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This is really more of a philosophical point than it is investing advice, but... Commodities prices have always gone through boom and bust cycles dictated by supply and demand, but things like grain and industrial metals will always maintain some value due to their inherent utility. Meanwhile the very long term (hundreds of years) historical failure rate of businesses and unbacked printed money is approximately 100%.

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For example, once new source of fuel becomes available, oil prices will plumet.

That's really long-term though.

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I don't think you realize how cheap oil is to produce relative to alternative sources of energy. You drill a hole in the ground and it spouts out. Considering oil is basically the lifeblood of our society, it really doesn't get any cheaper than that. Stuff like liquified natural gas, coal liquifaction, and tar sands are vastly more expensive to produce given curent oil prices. And these things are in limited supply as well, their prices are skyrocketing just as the price of oil is as energy demand increases. China has dozens of nuclear energy plants coming online in the next few decades, but look at what the price of uranium has done.

The endgame solution of renewable solar/hydrogen would require enormous investments in research, development, and infrastructure (probably trillions of dollars). The conundrum is that oil prices have to rise significantly before other energy sources become feasible. No company will take on those kind of costs with oil as cheap as it is currently. Personally I think government money would be better spent developing efficient alternative energy sources that we already have in abundance, such as wind and coal liquefaction, what we are doing in the Middle East.