April 27, 2006
Sensitive Dependence on Initial Conditions
Legg Mason Value Trust: 1Q 06 Bill Miller Commentary
Is it any surprise now that oil is a six-bagger, that copper has quadrupled in the past four years, that silver has tripled in three years, as has sugar, that orange juice has doubled in the past two years, and that after the biggest commodity rally in 50 years, it is NOW that prices are “set to soar” and that pension funds are falling all over themselves to allocate a portion of their assets to commodities?
It is not an accident that despite the consultants being armed with data going back 50 years about how adding commodities to a portfolio can improve risk-adjusted rates of return, there was zero interest among pension plans and investors generally in owning them until very recently.
The reason to own commodities may be that one believes they provide equity-like returns with little correlation with equities. The time to own commodities is (or at least has been) when they are down, when everybody has lost money in them, and when they trade below the cost of production. That time is not now. The data showing the returns of commodities will look very different if you start measuring just after prices have tripled.
I can’t help but be skeptical of the advice to start or increase a position in commodities AFTER the biggest bull move in 50 years.
Excellent commentary from Bill Miller that everyone should read closely. (I made basically the same points he does, though much less articulately and with a fraction of the historical perspective, in my “when the ducks quack” post about the DB Commodity Index ETF.)
April 27th, 2006 at 1:40 pm
He makes a good point. Jim Rogers has another perspective on this:
“The man who predicted the current commodities rally towards the end of the last century is reported as saying that the price of gold may not stop rising until it tops $1,000 an ounce.
“In an interview with Bloomberg, Jim Rogers, the ‘celebrity’ investor and commodities guru, stated that raw material and energy prices were such that it would continue to drive up the metals markets of gold, silver, copper and platinum.
“The shortest bull market for commodities lasted 15 years, the longest 23 years,” Mr Rogers told a Bloomberg interviewer. The current boom has been going for less than five.
“Mr Rogers gave investors further reason to look at commodities investments for long-term security.
“Supply and demand is terribly out of balance for nearly all commodities right now,” the former George Soros partner maintained, before claiming: “This is not a bubble.”
“Jim Rogers’ comments come in the same month that Paul Walker, the chief executive of gold market researchers GFMS, forecasted gold prices breaking the early 1980s record of $850 an ounce.
“With such strong support from respected business figures, the market has the potential for renewed vigour and a further boom towards the next milestone for gold prices at $700 an ounce.”
http://www.gold.org/value/news/article/3813/
So, what’cha gonna do now, fund manager?
April 27th, 2006 at 3:54 pm
Sounds as if jim rogers is making some PR for distribution purposes … he needs someone to unload his inventory to in the near future
April 27th, 2006 at 11:58 pm
Commodities Top and Nanotechnology…
Maoxian posted Bill Miller’s comments on commodities and how “pension funds are falling all over themselves to allocate a portion of their assets to commodities … AFTER the biggest bull move in 50 years.” Ray Kurzweil, in his book……
April 28th, 2006 at 12:44 am
jim rogers may have already unloaded (lost) millions, in the refco scandal bankruptcy….
September 12th, 2006 at 10:32 am
[…] You may recall the excellent commentary by Bill Miller I wrote about back in April. If you haven’t read Miller’s piece yet, there’s still time. […]