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Invest in commodities rather than commodity stocks
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July 06, 2006

Investment guru, Jim Rogers is skeptical on emerging markets right now. He has sold out of all emerging markets except China. He says that it is time to be very cautious on emerging markets.

Rogers also states that stocks not cheap anywhere, including US. He would prefer to use rallies to sell. Rogers feels that markets are unlikely to retest highs.

According to him, it is advisable to invest in commodities rather than commodity stocks. Rogers is bullish on Indian markets. Rogers expects sugar to do well over the next 5-10 years. He is also bullish on palladium, gold and silver.

Excerpts from CNBC-TV18's exclusive interview with Jim Rogers:

How are you feeling about emerging markets and do they have a reason to be optimistic after what the Fed said a week ago?

I am very skeptical of emerging markets right now. I have been investing in emerging markets for many decades, as you know. In the past several months, I have sold out of all emerging markets except China and I have owned some of these emerging markets for 15 to 20 years. As far as I am concerned, if they have got too far ahead of themselves, it is time to be very cautious.

To be fair, they have corrected quite a bit as well, but don't you think valuations have become attractive even after the fall? How have you read what the Fed is saying and what the Bank of Japan may say next week?

I do not see any really cheap stocks anywhere in the world including United States. If there are some cheap stocks on a valuation basis, I do not know about them. The Fed is not as powerful as it used to be, so I do not pay too much attention to them. You have to anticipate interest rates and  anticipate the Fed, otherwise you are just following the crowd.

If we look into the next few months or a year, what is it that you see for these emerging markets then; is it more weakness or do you think they are going to get a bit range-bound before they find any direction?

It is probably the latter. They are rallying right now and I would sell the rallies as they take place. You are not going to see any new highs or many new highs and if you do, they would not be substantially above the old highs.

Essentially, they are now in a downward trend and the downward trend is going to go on for quite some time; for months and perhaps for many years in some cases. If an emerging market is well managed and it has a lot of commodities, they might do well.

For instance, Canada but Canada is not an emerging market but it is going to do well because they have a lot of natural resources. Countries with natural resources would do well in the next 15-20 years if they are well managed.

Would that include a market like Russia?

The natural resources of Russia have peaked. Their production of raw materials has peaked and will decline in the next decade. That is one reason I am optimistic on raw material and Russia, as I can see, continues to have internal struggles and internal problems.

What about the harder commodities because in India, we track them quite closely; we have a large number of steel, aluminum and copper stocks, where do you stand on that end of the commodity?

Studies show that one would be better-off investing in commodities and sell them rather than commodity stocks. There was a study conducted, which showed that one would earn 300% more, by investing in commodities rather than commodity stocks.

India should be one of the great sellers of commodities and natural resources in the world. You have everything going for you; large population, large commodity market and you are beginning to develop normalized and formal commodity markets.

India should be one of the great commodity sellers in the world. I do not have any confidence that Indian government is going to let it happen but if I was a young Indian, I would be heading straight to the commodity markets.

As we talk about risk reduction globally, are there any concerns that there will be collateral damage on the liquidity in commodity markets that you have been tracking?

Absolutely, Japanese Central Bank has told us several times that they are going to be cutting back liquidity. I happen to believe that they are going to do that and that is going to take a lot of money out of the various systems. So it is going to be more difficult in the future to make money than it has been in the financial markets.

I am pessimistic about bonds, for instance. I am also pessimistic about new emerging markets that have gone into very high levels at least on a valuation basis. I am pessimistic about United States, I think United States will be in a recession, it may already be in a recession and if it is not, it will be within a year. I am pessimistic on many stock markets; I hope it is not the end of the world. I think it is a normal cycle, which we have had for several hundred years.

What is your take on the dollar now over the next twelve months and the emerging market currencies like the rupee?

I would sell the US dollar, I am extremely pessimistic on the US dollar. I hate to say it, I am a American citizen but US dollar is terribly a fraud currency. I would be putting my money into many other currencies. I do not know if I would buy the rupee because there is serious balance of trade problem.

But there are some emerging market currencies that would do well. I do not know if you can consider New Zealand or Singapore as emerging markets but some of the Asian currencies are better situated than some of the western hemisphere currencies. The Canadian dollar is a sound currency. I do not expect the euro to survive but I own the euro because it has less flaws than the US dollar and the US dollar is in serious trouble.

One of the causes of problems over the next few years is going to be the US dollar and the serious flaws in the US dollar.

What would you do with sugar in your agri-commodity bunch?

I am certainly optimistic about sugar. I do not know if I will buy it today, but sugar has got wonderful fundamentals going forward. As you know, India is a huge producer of sugar. Sugar is going to be an extremely exciting place to be in the next 5-10 years. I would not sell sugar if I own it.

Are you a bit surprised that despite the correction, which has taken place in all commodities markets, crude has been largely untouched. It is broadly held above USD 70?

First, let us correct that. Nearly all commodities have had a correction, cotton, wheat and maize are up; many commodities are up in the past several weeks or months. Copper and zinc are down but back to oil, it is surprising to say how high it stays and how high it eventually goes.

There are no major oil discoveries anywhere in the world for over 35 years. All the major oil fields and all the major oil companies in the world are loosing reserves so the prices are going to stay high. If bird flu wipes out Europe, or if there are some surprises like that or some major financial institution goes bankrupt out of the blue, then of course everything will go down.

Crude oil will go to USD 40 if something like that happens. But if it does, then you better buy all the crude oil and all the commodities that you can because they would go down the least and would be the first to go back up.

If you had to choose from the metals, would you pick the base or the ferrous?

If I had to pick one today, I would pick either palladium or gold and may be silver.

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