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D. Murali

BLUE chips get talked about with great reverence, but `commodities get no respect', writes Jim Rogers in Hot Commodities, from Random House (www.atrandom.com).

Thus, while people think of investing, what usually pop up are stocks, bonds, and real estate; "commodities rarely, if ever, hit the radar screen."

In the process what's ignored is a whole asset class that has performed well over time. Lest diffidence hold you back from moving into to this area, Jim narrates his own story of how he started off with a summer job in a firm on Wall Street, without knowing the difference between a stock and a bond. But he tracked "current affairs and history"; and a firm was paying him "for figuring out that a revolution in Chile would drive up the price of copper."

An insight that Jim shares is his finding years ago of `a major problem' about the CRB Futures Index: "Its 17 components were equally weighted." Means? "Crude oil constituted the same percentage in the fund as orange juice." Jim's next stop was "to see a friend who ran the Wall Street Journal", who said he didn't have a commodities index. "When I informed him that such an animal was listed daily in the pages of his newspaper, he was astonished — and thus gave me more proof of investors' disregard for commodities," recounts Jim.

He found that Dow Jones Commodities Index "hadn't been revised since at least the 1960s," and "Reuters commodities index hadn't been revised since the 1930s." What about the Goldman Sachs Commodity Index? "I saw a major flaw," writes Jim. "65 per cent of the fund was weighted toward hydrocarbons," assigning weights according to increases in prices, and so these "changed wildly every two years."

Journal of Commerce index had `hides and tallow' in its mix — something not in keeping with the times — because "neither hides nor tallow is traded on any exchange these days."

Also, the soft belly of the index had to with what goes into the belly of half the world: rice. "Not one of the existing indexes included this commodity," Jim found.

Inference: "All the indexes were too Americancentric." Disappointed in his search for a `well-balanced, consistent international commodities index', Jim started his own index and fund in 1998, launching the RICI or Rogers International Commodities Index, featuring "a basket of 35 commodities that help make the global economy go round."

Soon after, he too decided to go round, "driving through 116 countries and racking up 152,000 miles" over three years from January 1, 1999, and when he returned his index was up 80 per cent, though it was a different story for the followers of stock market. To Jim, `the next new thing is — things.' If you shy away from commodities — like the travel-wary who shun strange lands in fear of getting humiliated or cheated — you could be "missing out on an incredible opportunity", according to the author. For, "natural resources are the largest non-financial market on the planet."

However, the era of oversupply and low prices has given way to booming demand. For instance, increased use of SUVs in the US has led "fuel-economy averages to the lowest levels in 20 years"; the new McMansions require more heating and cooling; and Japan imports record quantities of refined copper, even as China gobbles up commodities "like the giant economic dragon."

In 2003, China consumed "one-third of the global supply of steel", which was more than what the US and Japan could both manage to. For those in commodities business, everything is okay as long as China doesn't sneeze — as it happened when not long ago the country's PM suggested that the economy needed to slow down, and sparked off panic in prices across world markets.

If you hesitate, saying, `but... ' Jim has quick answers to rebut the myths. First, on the fear of getting wiped out, the author explains how the low margin requirement — `even lower than 5 per cent' — helps you make a tonne of money without losing your shirt. Second, aren't we in the new economy, and isn't commodity a thing of the smokestack past? Jim's answer: "Technology can neither feed us nor keep us warm, and the demand for commodities will never disappear." Three, are the gains always due to speculation and currency depreciation? No, such effect is but `short term' and `marginal', assures the author. Four, the four-letter word, risk. Jim's answer is simple: "Commodities cannot go to zero, while shares in Enron can (and did)."

To help you start off research in commodities, the author counsels a look at supply and demand. Ask questions such as:

"How much production is there worldwide? Are there new sources of supply? What is this commodity most used for? Which of the current uses will continue? What alternatives are available to replace it if the prices go too high? What new technological advances might require this commodity?"

For instance, "Cable systems picked up the slack in copper demand for telephone wires."

Hope you're already warming up to pick up the Hot book!

BookValue@TheHindu.co.in

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