Jim Rogers: Another financial collapse could lead to a commodity boom

Aug 24, 2010

When there's a collapse, governments print money, leading to inflation and, in turn, investment in real assets. What's more, there's been underinvestment in agriculture and mining in Asia for decades.

Another financial collapse could lead to another commodity boom, says Jim Rogers.
If the UK or US were to default, as some fear, real asset prices would be one of the main beneficiaries, according to the veteran commodity investor.

Rogers is based in Singapore, because he sees Asia as a future base of economic prosperity. Commodities are growing in importance as many raw materials become scarcer and, taking the long view, there has been underinvestment in agriculture, mining and related processing industries in recent decades.

“Rightly or wrongly people do not invest in bear markets”, and commodities is a sector that has underperformed for decades, he says. Some commentators believe the UK and US are technically bankrupt and both countries could default in the next five years, adds Rogers.

Asia now accounts for half the world’s economic growth, says Nomura International chief economist Rob Subbaraman. The Asian Development Bank forecasts 7.9% GDP growth for developing Asia in 2010, while the International Monetary Fund forecasts 7.5% growth for all of Asia, and 6.75% in 2011.

So what can go wrong for the commodities sector?

“Well, what has gone wrong over history? There could be total financial collapse, which we have seen,” Rogers says. Then governments print money and, under inflationary pressure, people buy real assets such as commodities. If there was a war, commodities generally go up in that scenario as well."

Meanwhile, China and India’s populations are too large to ignore, he adds, although they are very different countries with different issues. What they have in common is that they are both coming out of several hundred years of decline. Historically, prior centuries saw them to be far more powerful nations, he argues.

Indeed, the Paris-based International Energy Agency (IEA) reported last month that China has surpassed the US to become the world’s biggest energy user, a mantle the US had held for over a century. IEA data showed China consumed 2.25 billion tonnes of oil equivalent last year, about 4% more than the US. The oil-equivalent metric represents all forms of energy consumed, including crude oil, nuclear power, coal, natural gas and renewables, such as hydropower.

So does Rogers have any tips for commodity investors today? “Do your own homework,” says Rogers. But he did note that sugar prices are 70% below historic highs.

He also says the number of commodity funds will no doubt grow. “There are 70,000-odd mutual funds to invest in and fewer than 100 commodity funds for the public,” he says.

Rogers is the founder of the Rogers Commodity Index. In the 1970s he set up the Quantum hedge funds with George Soros.