Coinciding with the listing of the Market Access Rogers International Commodity Index UCITS ETF (RICI LN) on the London Stock Exchange (see China Post Global relists flagship commodity ETFs on LSE), distinguished investor Jim Rogers spoke to an audience of more than 600 investors on a call co-promoted by ETF Strategy.
Rogers expressed a bullish view on commodities, submitting a compelling case for long positions in agriculture, metals – including gold and silver – and energy.
Rogers explained that the Rogers International Commodity Index (RICI) was conceived in 1996 when, frustrated at the choice of indices available on which to index-link personal account capital, he decided to create his own benchmark that would offer more comprehensive coverage of the true global commodity universe.
According to Rogers, commodity indices at the time consisted only of contracts traded on US exchanges which missed key exposures that were important to people’s daily lives.
Describing rival indices as “inadequate”, “hopeless” and “embarrassing”, Rogers was shocked to find that no index even had rice in it. “There are over three billion people in Asia who eat rice every day,” mused Rogers. “Same goes for rubber. I mean everybody’s got a car, or bicycle or motorcycle, or a truck or something. And yet no rubber in any of the existing indices.”
And so after substantial research the Rogers International Commodity Index, or RICI, was minted, with the first fund tracking the index in 1998.
The index reflects the performance of 38 front-month commodity futures, rolled monthly, from 13 international exchanges. By contrast, the Bloomberg Commodity Index (BCOM) and S&P GSCI consist of only 23 and 24 commodity contracts respectively.
The weights of individual commodities in the RICI are determined by a committee – headed up by Rogers – and based on long-term trends in global consumption while accounting for futures liquidity. The index is divided into three sub-indices – RICI Energy, RICI Agriculture and RICI Metals – contributing 40%, 34.9%, and 25.1% respectively.
The index has outperformed the BCOM and the S&P GSCI over its 22-year history which Rogers credits to the index’s larger exposure to energy commodities.
COVID-19 and commodities
Rogers acknowledges the severe impact that COVID-19 is having on economic activity, noting that the world is likely to have not faced a contraction of this magnitude since the Great Depression. He believes, however, that the disruption will be largely temporary, and output is likely to scale up again quickly although may remain below pre-pandemic levels for some time.
For this reason, Rogers is bullish on energy commodities. While Saudi Arabia and Russia have driven oil prices to record lows in a bid to force out US fracking companies (doing a “better job than they expected”), Rogers believes their recent truce likely indicates that the oil market is working out its bottom.
Once current lockdown restrictions ease, Rogers states that demand will start to right itself and, in time, ultimately go on to reach “new highs”.
“People will want to go back to the disco, to the beach, to travel overseas on holiday,” says Rogers. “Demand for petroleum and jet fuel will soar.”
When asked about the impact of stricter carbon emission regulations and the switch to green energy, Rogers acknowledges the transition but sees it as a long, slow process.
What is likely to affect energy commodities more, according to Rogers, is the steady decline of known crude oil reserves globally. Rogers notes that recent new discoveries of oil have been limited to small reserves in African countries.
Similarly, when looking at agricultural commodities, Rogers sees long-term structural trends being the primary drivers of performance. He notes that the RICI Agriculture sub-index has been by far the worst-performing of the three RICI segments, down 45% since 1998.
However, Rogers believes disaster and opportunity go hand-in-hand and the sector’s poor performance has changed the dynamics of the agricultural market. Fewer people are training to be farmers while the average age of current farmers has shot up dramatically in certain parts of the world.
Rogers notes that today “more students in America study public relations than study agriculture.”
The result, says Rogers, will be a structural undersupply of agricultural commodities in the future. Coupled with potentially lower migrant workers as a result of the COVID-19 pandemic and we have the makings of a bull market.
While Rogers is largely unfazed by the long-term impact of COVID-19 on the financial system, he believes a more insidious risk lies in the ongoing fiscal and monetary stimulus that began as a means to pull the global economy out of the last financial crisis.
Rogers notes that by central bankers’ own admissions in 2008, quantitative easing was an experiment with no consensus on its likely long-term impact; however, the policies were and are continuing to be supported by politicians more interested in short-term election results than long-term consequences.
What has resulted, says Rogers, is an unprecedented increase in leverage by sovereigns and corporates, driven by interest rates that have been artificially forced to record lows (and even negative in some cases).
While Modern Monetary Theory is championed by some, Rogers is sceptical, labelling it as a great theoretical idea but absurd in the real world, similar to the ideas of Karl Marx.
Rogers believes that the rally will eventually fail, and when it unwinds, bankruptcies will soar and investors will lose confidence in governments and currencies. Rogers believes that even the US dollar, which staged a strong rally during the recent COVID-19 market turmoil, may be unsafe.
The main beneficiary of such a crisis, according to Rogers, will be gold, something he has been buying in recent months, as he notes that people have hoarded the precious metal during uncertain times for thousands of years. While the price of bullion is reaching fresh highs in the midst of the current crisis, Rogers bets that the emergence of a structural financial crisis could really bring out the bulls.
Rogers is also a fan of silver (“I buy more silver than gold these days”) which he currently favours over gold. He notes that silver is trading at a historically favourable valuation while its diverse applications make it prime for a rally when industrial output revs up again.
COVID-19 and RICI composition
When asked whether COVID-19 will have a material impact on the composition of the RICI, Rogers re-iterated that the index reflects long-term global consumption trends. While the index has altered its composition before, notably by increasing the weight of natural gas seven years ago due to sustained growth in global demand, Rogers does not believe the current circumstances warrant significant changes.
“The RICI committee looks at major secular changes when altering index weights,” said Rogers. “If we find out orange juice causes cancer, that’s something we’ll certainly consider. But one of the aspects that makes an index good is that it shouldn’t change often.”
In concluding remarks, Rogers said he didn’t really see a future for cryptocurrencies, as we know them today, in the global economy as governments will introduce their own digital currencies and could make cryptos illegal.
On electric vehicles, Rogers believes it will take longer than expected for EV and clean tech to catch on as a lot of it is too expensive and dependant on subsidies to be affordable. Rogers noted that even Henry Ford’s wife had an electric car!
And so the case was made. The outlook for commodities is bullish and the way to play this asset class is through a long-term, broad-index-based approach.
For investors with this mandate, the Rogers International Commodity Index appears to fit the bill.