Renowned investor Jim Rogers has been a constant advocate of investments in commodities.

Research his views and provide a critique.

LIM Shuiyong LIU Jing Melissa LAW Shueh Li NG Soo Hwee QIN Hao

G12 Group 4

Who is Jim Rogers?

James Beeland Rogers, Jr. Renowned American Investor Living in Singapore since 2009 Chairman of Rogers Holdings and Beeland Interests Co-founder of Quantum Fund with George Soros Creator of Rogers International Commodities Index (RICI)

A commodity is a good for which there is a demand, but is supplied without qualitative differentiation across a market.

Commodities

OIL

NATURAL GAS

SUGAR

GOLD

LEAD

COFFEE

Why Commodities?
Central issue is the law of supply and demand
An increase in demand results in price increase

Supply shortage takes long time to fill up

Long bull runs

Stocks are more volatile than commodities Average commodities return comparable to S&P 500 Price of commodities can never fall to zero

How are Commodities Traded?

Individual Account Managed Account Trading futures options Commodity pool Mutual funds Index investing (Recommended)

Oil

Background of Oil
Unique features of Oil Industry
Organisation of Petroleum Exporting Countries (OPEC) influence supply and prices through member nation quota system Subject to supply disruptions due to political instabilities Prices affected by either real or perceived possibility of disruptions Oil transactions settled in USD

Uses of oil

Top 5 Oil Consumers

Country Consumption (Thousand barrels per day) 18,810 8,324 4,443 3,110 2,740 Percentage of Global Oil Consumption

United States China Japan India Russia

Source: US Energy Information Administration, 2009

Top 5 Oil Producers

Country Production (Thousand barrels per day) 9,934 9,760 9,141 4,177 3,996 Percentage of Global Oil Production

Russia Saudi Arabia United States Iran China

Source: US Energy Information Administration, 2009

Rogers View
Supply will decrease
No new major oilfield found for 35 years OPEC suspected of inflating oil reserves Hubberts Peak may be reaching soon, or has already been reached Efforts to find alternative sources of oil has been relatively unsuccessful

Demand will increase

Emerging Asia is expected to double its oil demand

Time Series Analysis of Oil

100 90 Demand/Supply (Million barrels/day) 80 70 60 50 40 30 20 10 0 2000 2001 2002 2003 2004 2005 Year 2006 2007 2008 2009 2010 Demand Supply Value (USD)

Critique
External factors: political reasons play a huge role on the prices of oil
WHY? Data on political effects of Iraq Wars, Middle East crisis, Japan

Possible Uncertainties
Growing environmental concerns
World is looking towards renewable and sustainable sources of energy Greater research on alternative sources of energy If successful, demand of oil will be vastly affected

Political complexities
Japanese nuclear situation might fuel greater need for fossil fuels in the long run Middle Eastern political unrest might continue damaging oil reserves

Natural Gas

Gold

Background of Gold
Increasing stockpile
Does not get consumed/destroyed Convert to bullion with minimal loss in value

Ancients valued gold for

Rarity Durability Ornamental appeal

Rogers View
Price driven up by Goldbugs
Pessimistic investors that believe gold will have value at the end of days Motivated by fear of inflation, weakening Dollar and political instability Not motivated by supply and demand

Easily oversupplied
No gold is consumed/destroyed Almost half of existing metal exploration is for gold

Rogers View
Net decreasing demand
New technology to replace gold in dentistry New use in electronic industry Decreasing usage of gold in jewelry

Other metals more profitable

Supply allowed to dwindle

Supply of Gold
4800 4300

3800

3300

2800 Tons Recycled gold Official Sector Mine 1800

2300

1300

800

300

-200 2004 2005 2006 2007 2008 2009 2010

Demand of Gold
4600 1400 4100 1200 3600 1000

3100

US dollar per ounce

2600 800 Tons 2100 600 1600

OTC Market Industry ETF & other similar Bar&Coin Jewelry Gold Price $/oz

1100

400

600 200 100

-400 2004 2005 2006 2007 2008 2009 2010

Data/Charts

Critique
Goldbug Demand
Gold has -0.65 correlation with Dollar
Uncertainty in market causes value of Dollar to drop and results in increase demand for Gold

Gold has 0.08 correlation with Inflation

Low correlation can be used to protect against inflation

Global financial instability

Default of sovereign debts Middle East unrest

Critique
Goldbug infiltrate central banks
Net buyer of gold for first time in 21 years (since 1989)

Growth of Asian Wealth

Indias gold jewelry demand increased 69% Chinas gold jewelry demand increased 13% and investment demand increased 70%

Result: Demand > supply

Record level price of $1432.57 Gold performance far exceeded Jim Rogers expectation Goldbugs might be here to stay due to the global instability

Possible Uncertainties
Future state of USA economy
Largest debt the world has ever seen If not handled properly will lead to long term damage to the economy

Shifting of financial power to Asia

Possibility of keeping reserves in Yuan

Limitations of Critique

Coffee

Background of Coffee
Ethopia said to first discover coffee and its energizing effects First evidence of it being used for drinking in Yemen First roasted and brewed in Arabia First kopitiam: 1645, Venice, Italy Second most traded commodity after oil

International Coffee Agreement

Rogers View
Decrease in supply Bad weather Increase in demand Long cultivation period

Data/Charts
160000

140000

120000

100000

80000

Production ('000 bags) Consumption

60000

40000

20000

0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Data/Charts
Prices (cents per ounce)
160 140 120 100 80 Prices (cents per ounce) 60 40 20 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Critique
Less coffee growers Unfavorable conditions Global warming Increased consumption

Possible Uncertainties
Weather Demand Exchange rates Technology

Limitations of Critique

Sugar

Rogers View
Price of sugar will increase Demand > Supply
Sugar can be converted to ethanol, which is used to mix gasoline High oil prices will divert more sugar to produce ethanol and hence decrease the supply of raw sugar Chinas recent move to import sugar instead of remaining selfsufficient

Background of Sugar
Sugarcane 75% Sugar Beets 25%

Sugar
Local consumption 75-80%% Free market 20-25%

Price of Sugar
30.00 25.00

20.00

15.00

10.00

cents/poun d

5.00

0.00 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Sugar Producers
Producers Brazil European Union India China United States Mexico South African Development Community Australia Thailand Russia Amount of sugar (in millions of tons) 30 22 20 10 7 6 5.7 5.4 5 2.7

Critique
World sugar production for 2010/11 is forecast at 164 million (up 12 million)

Consumption is forecast at a record 158 million

Demand Side Factors

Using simple demand and supply analysis, we can predict that the high prices of sugar will cause the demand of sugar to fall Demand for sugar is also dependent on oil prices

Supply Side Factors

Farmers try to take advantage of the previously high sugar prices
China, Brazil, Thailand and Russia farmers might be able to close the gap between demand and supply

Real problem for the sugar market the lack of real investment

Limitations of Critique
Assumption that weather conditions are normal for agriculture of sugarcane and sugar beets

Lead

Background of Lead
Malleable, dense and corrosion-resistant Poisonous

Usage of Lead
Mainly in electrical cable covers and solders Starting-lighting-ignition (SLI) lead-acid storage batteries (88% of the worlds lead) Lead additives were put into gasoline for better engine performance Special electrical power systems for hospitals that are not subject interruption Prevent the emission of harmful radiation from television

Rogers View
4000 3500 3000 2500 2000 1500 1000 500 0

Critique Supply Side Factors

The production in the US has been down for 8 years Lead production from mines worldwide was down as well In summary, lead supplies are down worldwide.

Lead Supply
1,600,000 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008

Australia Canada China Mexico Peru US

Critique Demand Side Factors

Increasing demand for cars
China is a dominant factor

TV and computer monitors

Lead is used to block radiation

In summary, there is an increasing demand for lead

Production of Cars
75000000

70000000 Car Production 65000000

60000000

55000000

50000000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Possible Uncertainties
China
Giant consumer for metals Major player in supplier Closure of inefficient factories

Research in potential substitutes

Limitations of Critique

THE END.

References
http://gulfnews.com/mobile/business/oil-gas/libyan-unrest-likely-toleave-deep-scars-on-oil-sector-1.766369 http://www.eco-action.org/dt/oilfut.html http://www.hubbertpeak.com/hubbert/wwf1976/ World Oil Demand and its Effect on Oil Prices, CRS Report for Congress (2005)