Is Jim Rogers Crazy?

Or: Do speculators matter in commodities? Or are they irrelevant to a long-term investor?, Butter, Milk And Gold: Global food shortage to hike inflation (UK shopping bill 30% until Christmas) and drive up gold prices
Is Jim Rogers Crazy? Or: Do speculators matter in commodities? Or are they irrelevant to a long-term investor?
From HardAssetsInvestor.com: Two weeks ago, I emailed a handful of the smartest people I know to ask them if the current credit crunch and the ongoing vacillations in the stock market would impact the commodities market. The exact question I sent was this: “What do you think of how the credit crisis is impacting the commodities market? Should commodities investors be worried?”

The answers I got were usually well-reasoned and carefully considered, and typically focused on the impact of speculators pulling out of the market. And then there was Jim Rogers. In the way only he can do, Rogers framed the issue simply and succinctly: “There are always corrections in every bull and bear market,” he wrote. “If you think this will change the secular bull market, you have no clue what is going on.” You gotta love it.

I give Jim a lot of respect. But then again, I give the other people I emailed–like Hilary Till, principal at Premia Capital and co-editor of the new book, Intelligent Commodity Investing–a lot of respect too. Here’s what she wrote:

"In the short term, yes, the commodity markets were (and are) clearly impacted by the "de-risking" and deleveraging. For example, on Thursday (8/16/07), all commodity markets (that are in the DJAIGCI) were down. Then on Friday, after the announcement of the Fed action, there was a simultaneous rally of risk assets."

The obvious difference between Rogers and Till is time frame. As anyone who has read Rogers’ book, Hot Commodities, knows, Jim is a very big-picture investor. His investment thesis looks out 10, 20 or more years into the future, and his bullish position on the commodities market is predicated on a long-term supply/demand imbalance. Till, meanwhile, is a hedge fund manager who, by nature, responds to both short- and long-term trends.

But their different perspectives got me to thinking. Even if speculators aren’t driving long-term trends, how much are they influencing the short-term market? And where, exactly, do those short- and long-term trend lines meet? Moreover, don’t short-term pricing issues also impact the commodities market over the long term?

A warning to readers: This article asks more questions than it answers. But it does, at least, lay out the data and make some assumptions about how markets are moving.

Speculators Do Matter In Commodities
Let’s start with what we know.

Point 1: Speculators do matter in the commodities market, both short and long term.
History shows us that–at least in certain situations–speculators can have outsized and lasting impacts on commodities. When the Hunt Brothers attempted to corner the market on silver, for instance, they drove up the price to $50/ounce. There might be a long-term supply deficit for silver, but if you bought at $50/ounce, you’ll be waiting a long time to get back to even.

Similarly, we’ve seen price spikes on the London Metal Exchange (LME) recently that were undeniably linked to speculative moves. These cases, such as the recent run-up in tin and similar spikes in nickel, were the result of classic short squeezes: Traders sensed that physical inventories of different metals were tight, and they caught the shorts in a squeeze by buying up all the available metal. Sellers were forced to pay exorbitant prices just to get back to even.

Point 2: Over the short term, commodities have become risk-sensitive assets.
Time and again during the recent bull market, the commodities futures markets have suffered serious setbacks hand in hand with stock market pullbacks, including the May/June 2006, February 2007 and mid-August 2007 retreats. This is contrary to the broad perception of commodities, which holds that they are negatively correlated to the equity markets. Recently, they have been strongly correlated–even leveraged–to the volatile trends driving stock prices. Consider what happened from May 10, 2006, through June 13, 2006. As investors pulled out of the stock market, the Nasdaq index fell 10.4% and the S&P 500 fell 7.3%. Over the same time frame, "hot" commodity investments like silver (down 32%) and copper (down 18%) fell further. Full article: Source

Butter, Milk And Gold: Global food shortage to hike inflation (UK shopping bill 30% until Christmas) and drive up gold prices
From HardAssetsInvestor.com: Adam Leyland, editor of The Grocer—the food & drink industry's favorite weekly reading here in the United Kingdom—says the cost of the average Briton's weekly shopping bill could rise 30% by December.

Thirty percent? By Christmas?

The cost of food has already risen 6% from this time last year, outpacing the official Consumer Price Index by a factor of two. And yet, even with runaway inflation set to kick in this autumn, Leyland sees the threat as just somebody else's problem. "If I were [the UK finance minister] Alistair Darling or a pensioner, I'd be very worried," he tells the British press. So it's a good job, then, that he's the editor of a weekly business-to-business magazine instead. Right?

Maybe William Reed, the magazine's publishers, has agreed to index-link Leyland's salary to the cost of Flora—the U.K.'s best-selling margarine. This weekend, the bright yellow goo cost 41% more per tub than it did a week earlier, according to The Grocer's own data.

"Butter and spread prices are moving," Leyland tells The Daily Star newspaper, because "in recent weeks we have seen milk prices lurch up." Domestic milk supplies shrank dramatically last month, thanks to the U.K. government-sponsored foot and mouth outbreak, coupled with the heaviest summer rainfall to hit England's farmland since records began.

"The situation is going to be very tight over winter," warns the Milk Development Council. Butter stocks in the European Union are now 50% below last year. But it's not only lactose that will cost U.K. consumers more at the checkout today. Indeed, consumers everywhere face a genuine threat of sharply higher food costs, too.

Which makes you wonder: Why is the financial world piling into fixed-income government bonds at the fastest rate since 2003...?

Sainsbury's, the U.K.'s third-largest supermarket, just hiked the price of its cheapest apples by 140% to nearly £1.20 per kilo