Avoid Dollar at "All Costs":Jim Rogers

Courtsey:Bloomberg

Jim Rogers, who in April 2006 correctly predicted oil would reach $100 a barrel and gold $1,000 an ounce, said investors should steer clear of the dollar as the U.S. economy slows and favor commodities this year.

The dollar has slipped 7.7 percent against the euro and 5.9 percent versus the yen in 2008 as the Federal Reserve cut interest rates to stave off a U.S. recession. Oil prices have doubled in the past 12 months, while gold is up 44 percent.

Avoid the dollar ``at all costs,'' Rogers, chairman of Rogers Holdings, said in a speech in Shanghai today. ``The best investments in 2008 are commodities and natural resources. Agricultural prices have much higher to go over the next decade. We have a shortage of everything, including seeds.''

Oil and metal prices in New York have surged as a slumping U.S. currency made them cheaper for non-dollar investors to buy as a hedge against inflation in a slowing global economy. The dollar has stabilized in recent weeks, with currency volatility falling by the most since 1999 this quarter.

The comments from Rogers, 65, come two days after he told investors at a conference in Nanjing not to ``give up'' on Chinese shares, which have made China the world's second worst performers this year. Rogers, who first started buying Chinese stocks in 1999, said he hadn't sold any of his holdings.

Commodity Bull
Investors failed to take heed today, as the benchmark CSI 300 Index extended an eight-month slump amid expectation government measures to slow inflation will hurt corporate profits. The gauge is down 53 percent from its Oct. 16 record and has dropped 23 percent in June. That would be the index's worst month since it was introduced in April 2005.

Rising food and fuel costs have helped to drive China's consumer prices to their highest in almost 12 years, prompting the central bank to lift interest rates six times last year and order banks to set aside a record amount in reserve to curb loan growth.

Speculation that the People's Bank of China would raise borrowing costs for the first time this year dragged the CSI 300 down by 5.5 percent on June 27.

Rogers, who now lives in Singapore, is best known for being a commodity bull since 1999, before the market started to rally in 2002. His Rogers International Commodity Index has more than quadrupled since it started in 1998.

The price of wheat, rice and soybeans reached records this year after adverse weather curbed global output and reduced stockpiles amid rising demand.

`Not High Enough'

Rogers is anticipating further gains in crude oil, which reached an all-time high of $142.99 a barrel on June 27. Futures were recently at $142.74.

``Crude oil prices are not high enough to stop people from consuming more energy,'' the investor said. ``The bull market will not go to an end until supply and demand come to a balance.''

His comments today echo the themes in his latest book ``A Bull in China: Investing Profitably in the World's Greatest Market,'' in which he tells investors to get out of the dollar, teach their children Chinese and buy commodities.

Rogers said last October he planned to shift all his assets out of the dollar, which fell to a three-week low against the yen on June 27. He predicted last month that the U.S. currency's decline would pause in the second quarter because it was overdone.

The real reason why oil prices are rising - Interesting Read!!

The real reason why oil prices are rising

By now it is becoming too obvious that the United States is playing the oil game all over again. And this is the desperate gamble of a country whose economy is neck deep in trouble.

Given this scenario, managing prices of oil is central to the US economic architecture. Expectedly, this gamble has been played in a great alliance between the US government, US financial sector and the media.

The impending collapse of the US dollar on account of the inherent weakness in the US economy caused by its structural weakness as reflected in the sub-prime crisis;

The repeated softening of the interest rates in the US that has the potency to kill the US dollar; and how the fall in the US dollar suits the US corporate sector, especially its omnipotent financial sector.

Naturally, since the past few years, the US financial sector has begun to turn its attention from currency and stock markets to commodity markets. According to The Economist, about $260 billion has been invested into the commodity market -- up nearly 20 times from what it was in 2003.

Coinciding with a weak dollar and this speculative interest of the US financial sector, prices of commodities have soared globally.

And most of these investments are bets placed by hedge and pension funds, always on the lookout for risky but high-yielding investments. What is indeed interesting to note here is that unlike margin requirements for stocks which are as high as 50 per cent in many markets, the margin requirements for commodities is a mere 5-7 per
cent.

This implies that with an outlay of a mere $260 billion these speculators would be able to take positions of approximately $5 trillion -- yes, $5 trillion! -- in the futures markets. It is estimated that half of these are bets placed on oil.

Oil price hike: Govt can't save you: PM
Readers may note that oil is internationally traded in New York and London and denominated in US dollar only. Naturally, it has been opined by experts that since the advent of oil futures, oil prices are no longer controlled by OPEC (Organization of Petroleum Exporting Countries). Rather, it is now done by Wall Street.

This tectonic shift in the determination of international oil prices from the hands of producers to the hands of speculators is crucial to understanding the oil price rise.

Today's oil prices are believed to be determined by the four Anglo- American financial companies-turned-oil traders, viz., Goldman Sachs, Citigroup, J P Morgan Chase, and Morgan Stanley. It is only they who have any idea about who is entering into oil futures or derivative contracts. It is also they who are placing bets on oil prices and in the process ensuring that the prices of oil futures go up by the day.

But how does the increase in the price of this oil in the futures market determine the prices of oil in the spot markets? Crucially, does speculation in oil influence and determine the prices of oil in the spot markets?

Answering these questions as to whether speculation has supercharged the demand for oil The Economist, in its recent issue, states: 'But that is plain wrong. Such speculators do not own real oil. Every barrel they buy in the futures markets they sell back again before the contract ends. That may raise the price of 'paper barrels,' but not of the black stuff refiners turn into petrol. It is true that high futures prices could lead someone to hoard oil today in the hope of a higher price tomorrow. But inventories are not especially full just now and there are few signs of hoarding.'

On both counts -- that speculation in oil is not pushing up oil prices, as well as on the issue of the build-up of inventories -- the venerable Economist is wrong.

The finding of US Senate Committee in 2006
In June 2006, when the oil price in the futures markets was about $60 a barrel, a Senate Committee in the US probed the role of market speculation in oil and gas prices. The report points out that large purchase of crude oil futures contracts by speculators has, in effect, created additional demand for oil and in the process driven up the future prices of oil.

The report further stated that it was 'difficult to quantify the effect of speculation on prices,' but concluded that 'there is substantial evidence that the large amount of speculation in the current market has significantly increased prices.'

The report further estimated that speculative purchases of oil futures had added as much as $20-25 per barrel to the then prevailing price of $60 per barrel. In today's prices of approximately $130 per barrel, this means that approximately $100 per barrel could be attributed to speculation!

But the report found a serious loophole in the US regulation of oil derivatives trading, which according to experts could allow even a 'herd of elephants to walk to through it.' The report pointed out that US energy futures were traded on regulated exchanges within the US and subjected to extensive oversight by the Commodities Future Trading Commission (CFTC) -- the US regulator for commodity futures market.

In recent years, the report however pointed out to the tremendous growth in the trading of contracts which were traded on unregulated OTC (over-the-counter) electronic markets. Interestingly, the report pointed out that the trading of energy commodities by large firms on OTC electronic exchanges was exempted from CFTC oversight by a provision inserted at the behest of Enron into the Commodity Futures Modernization Act in 2000.

The report concludes that consequential impact on account of lack of market oversight has been 'substantial.'

NYMEX (New York Mercantile Exchange) traders are required to keep records of all trades and report large trades to the CFTC enabling it to gauge the extent of speculation in the markets and to detect, prevent, and prosecute price manipulation. In contrast, however, traders on unregulated OTC electronic exchanges are not required to keep records or file any information with the CFTC as these trades are
exempt from its oversight.

Consequently, as there is no monitoring of such trading by the oversight body, the committee believes that it allows speculators to indulge in price manipulation.

Finally, the report concludes that to a certain extent, whether or not any level of speculation is 'excessive' lies entirely in the eye of the beholder. In the absence of data, however, it is impossible to begin the analysis or engage in an informed debate over whether our energy markets are functioning properly or are in the midst of a speculative bubble.

That was two years back. And much water has flown in the Mississippi since then.


Now to answer the second leg of the question: how speculators are able to translate the future prices into spot prices.

The answer to this question is fairly simple. After all, oil price is highly inelastic -- i.e. even a substantial increase in price does not alter the consumption pattern. No wonder, a mere 3-4 per cent annual global growth has translated into more than a 40 per cent annual increase in prices for the past three or four years.

But there is more to it. One may note that the world supply and demand is evenly matched at about 85 million barrels every day. Only if supplies exceed demand by a substantial margin can any downward pressure on oil prices be created. In contrast, if someone with deep pockets picks up even a small quantity of oil, it dramatically alters the delicate global demand-supply gap, creating enormous upward pressure on prices.

What is interesting to note is that the US strategic oil reserves were at approximately 350 million barrels for a decade till 2006. However, for the past year and a half these reserves have doubled to more than 700 million barrels. Naturally, this build-up of strategic oil reserves by the US (of 350 million barrels) is adding enormous pressure on the oil demand and consequently its prices.

Do the oil speculators know of this reserves build-up by the US and are indulging in rampant speculation? Are they acting in tandem with the US government? Worse still, are they bordering on recklessness knowing fully well that if the oil prices fall the US government will be forced to a 'Bears Stearns' on them and bail them out? One is not sure.

But who foots bill at such high prices? At an average price of even $100 per barrel, the entire cost for the purchase of this additional 350 million barrels by the US works out to a mere $35 billion. Needless to emphasise, this can be funded by the US by allowing it currency printing presses to work overtime. After all, it has a currency that is acceptable globally and people worldwide are willing to exchange it for precious oil.

No wonder Goldman Sachs predicts that oil will touch $200 to a barrel shortly, knowing fully well that the US government will back its prediction.

And, in the past three years alone the world has paid an estimated additional $3 trillion for its oil purchases. Oil speculators (and not oil producers) are the biggest beneficiaries of this price increase.

In the process, the US has been able to keep the value of the US dollar afloat -- perhaps at an extra cost of a mere $35 billion to its exchequer!

The global crude oil price rise is complex, sinister and beyond innocent economic theories of demand and supply. It is speculation, geopolitics and much more. Obviously, there is a symbiotic link between the US, the US dollar and the oil prices. And unless this truth is understood and the link broken, oil prices cannot be
controlled.

Ban of Commodity Futures: Is it justified? KARVY

Futures trade in agriculture commodities had another bad day on 7 May 2008 with FMC announcing suspension of futures trade in four commodities namely chana, soy oil, potato and rubber for four months that is till 6th September. Government has already de-listed four major commodities like wheat, rice, urad and tur in January – February 2007. Government was under pressure from various political parties for last few weeks to impose ban on futures trade in essential commodities, alleging futures trading is responsible for sharp rise in prices. Inflation remained above 7% for four consecutive weeks from March onwards.

Commodity futures provide platform for farmers, traders, exporters and other corporates to hedge their positions. Speculators provide liquidity in the market with active participation. Prices of any commodity follow its own fundamentals and price manipulation by few traders is not possible if it is perfect market.

Supply-Demand mismatch
Prices of agriculture commodities especially edible oils, chana and rubber rose sharply in the past six months. Soy oil prices gained by about 35% with in short span of in five months (October 2007 and February 2008) and touched Rs.740 per quintal in domestic markets. Domestic prices moved up sharply tracking global prices especially CBOT and MDEX. At CBOT, prices gained by about 47% during same period. Global Soy bean output has declined by 7 percent to 220 million tonnes in 2007-08 against 237 million tonnes in previous year. Edible oil seeds production has also declined to 390 million tonnes compared to 408 million tonnes in last year. Major fall in soy bean output was in US with decline of around 20% in this season. Short fall in global output of soy bean and shifting large chunk of agriculture produce for bio-fuels led to sharp gain in prices of all the edible oils.

Chana prices also have gained by more than 30% in the last six months due to lower output concerns. Production of rabi chana 2007-08 estimated below 50 lakh tonnes compared to 58 lakh tonnes in previous year. Carry forward stocks are almost nil. Prices were trading at one year low of Rs.2000 per quintal during end of 2008 and lower estimates led to sharp rise in prices towards Rs.3000 per quintal in last 4-5 months. India imported more than 1.2 million tonnes of pulses in 2007-08 and failed to keep prices low as import prices ruled high. India annually produces about 13-14 million tonnes of pulses and this output almost stagnant for last 15 years. Consumption is rising every year with increasing population. India is largest importer of pulses and import about 2-3 million tonnes.

Rubber prices have gained by 23 percent in the last four months in domestic markets. Rubber global production is 9.89 million tonnes in 2007 compare to 9.68 million tonnes in 2006, while, consumption has increased to 9.73 million tonnes in 2007 from 9.21 million tonnes in 2006. India has produced about 8.25 lakh tonnes in 2007-08 compare to 8.53 lakh tonnes in previous year. Increasing demand for rubber in global markets and strong crude oil prices led to sharp rise in prices in recent past.

Potato prices fell from recent high of Rs.650 levels to Rs.450 with in span of one month with increasing arrivals. Output estimated at 28-29 million tonnes in 2007-08 higher from 25 million tonnes in previous season. Higher arrivals and lack of demand pulled down the prices of potato. Few state governments including West Bengal provided intervened in spot markets to support the prices.

Government measures
Government took various measures to control the rising prices of food commodities. It reduced import duty on refined edible oil from 40-45% to zero percent in March 2008 to control the rising prices of edible oils. India import about 50% of total domestic requirement and is price taker in global markets.

Price movement especially in Malaysia and US has direct impact on domestic markets. Edible oil prices have marginally come down in the past one month after Government reduced import duty on edible oils. Soy oil prices fell by Rs.150 per quintal with in span of one month. Apart from reducing import duties on edible oils, Government also directed states to strictly impose the stock limits on food grains and pulses.

Various states including Maharashtra, Andhra Pradesh and Delhi conducted raids on stock hoarders to bring out the excess stocks. This led to panic selling of pulses in spot markets and led to sharp fall in prices of most of pulses. Chana prices fell from recent high of Rs.3000 levels towards Rs.2300 with in one month period.

Impact of recent Government measures
In spite of taking these many measures, inflation remained high and touched 42 month high of 7.61% for week ending 26th April. Prices of most of agriculture commodities fell in the past few weeks as a result of Government intervention and also declining demand at higher levels apart from fall in prices of edible oils in global markets. However, higher prices of non-agriculture commodities like steel and cement remained high boosting inflation further.

Outcome of Abhijit sen committee report
Abhijit sen committee was constituted in March 2007 to study the impact of futures trade on agriculture commodity prices. it submitted report on 29th April 2008 to Government. It found no evidence of futures trade affecting the spot prices of agriculture commodities. His statements was, "I don't think one can say anything conclusively whether futures impacted prices," after submitting the report to Agriculture department. It recommended continuation of futures ban on wheat, rice, urad and tur, but not recommended any fresh ban on any commodities.

Is suspension justified?
Now big question arises as to what was the need for suspension of futures trade in four agriculture commodities when prices of edible oils have already eased and they are largely influenced by global factors rather than domestic factors.

It is strange that soy bean is left out from this list and Soy oil, a biproduct of soy bean has been suspended.

Chana prices have already fallen by 20% in last one month and what was the need to suspend futures rather than improving supply.

Potato prices are already trading at one year low and farmers are affected due to lower prices. Those who are demanding imposition of ban on futures trade in agriculture commodities are themselves providing support price to potato in West Bengal. Now it is very difficult to understand in what way Potato prices caused the inflation.

Volumes in rubber futures are almost nil in exchanges and there is no question of speculation increasing the prices with such low volumes. Also one should understand that Rubber and Soy oil are internationally traded commodities and domestic prices move in tandem with the international prices. Now it is important to watch for how long the disparity is maintained given the supply- demand mismatch across the world.

Various sections of people have criticized this decision of Government and real market players have lost confidence in futures trade. This includes representatives of various organizations of exporters, importers, processers etc. All these participants were using exchanges to hedge their positions. Now that in most of the rural areas NCDEX prices have become the bench mark, the farmer and small trader community will be deprived of better price discovery mechanism. Since Chana and Soy oil future contribute almost 35% of total Agri futures volumes, the future of Commodity derivatives market will be under threat.

Time and again suspension of future commodities trade to tame the domestic inflation will dilute the basic objective of introducing futures trade in India. As this is just a suspension and not a complete ban, the reintroduction may not result in good volumes since the participants have already lost their trust in Government. To conclude the government should focus more on ensuring enough supplies in the market with measures such as enhancing productivity, better cultivation practices etc.