American author hot on commodities

(February 14, 2005) Commodity-rich Canada will produce profits for savvy investors in the years to come, says U.S. author and professor Jim Rogers, who was visiting Toronto last week. “Canada is one of the great natural-resource-based economies of the world,” he enthused at a presentation hosted by Tricycle Asset Management, noting that the current commodities bull market started in 1999.

Rogers, an avid traveller and author of several books, including Hot Commodities, Investment Biker and Adventure Capitalis, sees demand driven by increasing Western requirements for oil, increasing demands by China and depletion of established sources such as Britain’s North Sea operations.

The learning curve for investors entrusting their money to commodities will mirror the curve during the early days of mutual funds, said Rogers. “They don’t know how to spell commodities, just as 25 years ago, most people didn’t know what stocks were or even how to spell mutual funds. For Canadian advisors, applying Rogers’ belief in commodities means focusing on investments in industry sectors and companies that would benefit from rising prices.

“A mining operation — if whatever it is they are mining goes up by 25% in price or by 30% in price — that feeds straight through to the bottom line,” he says.

That happens because the cost of extracting resources from the ground typically does not rise in proportion to the increased market price of the same resource, explained Michael Herring, Managing Director and Fixed Income Strategist at the BMO Nesbitt Burns Portfolio Services Group, in an interview.

For an advisor, this can mean dealing with a client who has experienced losses in mining investments, or has heard about them and become cynical. “That’s the typical opinion of people who have been reading in the newspapers about mine failings in the last 22 or 23 years. During that period of time there was a secular bear market for commodities,” Herring recalled.

Commodity prices fell through the 1980s and 1990s as a result of oversupply during the 1970s. We are now in the early stages of a secular bull market for commodities, said Herring, who urged clients in January 2003 to increase emphasis on hard assets and decrease emphasis on financial assets.

Advisors will have a steady stream of appropriate offerings in their product rosters, as Herring believes the investment industry will increasingly launch products offering participation in commodities, such as principal-protected notes and mutual funds with direct commodities holdings.

On other topics, Rogers warned that the American dollar is headed for big trouble and could drag unwary investors down with it. “The U.S. dollar is now terribly flawed,” he opined. “We in the U.S. owe the rest of the world $8 trillion,” he said, noting that debt rises by $1 trillion every 20 months. This, Rogers says, led to the American government’s decision to allow its currency to slide into a potentially disastrous downward spiral while the Canadian dollar remains relatively strong.

“You’ve got to prepare yourself, your clients, your own portfolios and your own lives for this dramatic change,” he urged. For Canadian advisors, that preparation means de-emphasizing U.S. equities and focusing on investments denominated in Canadian dollars and Canadian corporations, added Herring.

Art Melo is a Toronto-based freelance writer