Hold on to your commodity stocks

Time of article published Oct 25, 2003

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Jim Rogers, the co-founder with George Soros of the legendary Quantum Fund of the 1970s, has good news for South Africans.

According to Fortune magazine, Rogers does not believe that United States markets are the place to be right now, nor will they be for the next few years. Importantly for South Africans, he believes the best place to invest is commodities.

This is where the next bull market is, he says, and he has put his money where his mouth is: his international commodity index fund is up 100 percent since August 1, 1998.

According to Rogers, supply is flat to down, demand continues to grow and inventories have been worked off. He believes the bull market has already started and commodities will do well for the next few years.

Rogers believes investors should invest in resource-based economies such as South Africa, Australia, New Zealand and Canada. And along with many other commentators, he believes the 21st century will belong to the Chinese.

According to Rogers, commodities have a bad name because so many investors have lost their shirts in this sector. The reason is that most commodity investors invest with a very low margin, which leads to a geared position, so even a small fluctuation wipes out their entire investment.

South Africa has some of the most admired commodity stocks in the world, despite all the transnational amalgamation in the sector. Of course, a critical variable for South African investors remains the external value of the rand and investors should factor this and the mining charter into their deliberations.

In this regard Tito Mboweni, the governor of the Reserve Bank, is very much behind the curve in the currency wars, while Japan and China are the undisputed leaders.

Mboweni missed a golden opportunity earlier this year to radically drop interest rates, and now he has the wind from the front as the dollar continues its long-term decline. He is left playing a fairly pathetic game of "me too" cuts in interest rates.

And this month De Beers joined a growing throng when it announced job cuts in the face of pressures brought about by the strengthening rand, which is eating into its dollar-denominated revenues. According to managing director Gary Ralfe, the rand's rapid appreciation against the dollar poses a "serious and immediate" challenge to De Beers.

Ralfe added: "The current financial climate dictates a critical review of all our overheads to ensure that costs are reduced and value added."

Also blaming the strong rand, Durban Roodepoort Deep says it has no choice but to retrench 3 000 workers at two of its gold mines.

A further worry is the effect a strong rand will have on tourist numbers. President Thabo Mbeki and other senior government officials have stressed the importance of tourism in the creation of new jobs, with every eight visitors to South Africa creating one permanent job.

According to Mbeki, tourism has the potential to grow much faster than the economy as a whole, but with increased supply and increased costs for overseas visitors, the industry may not achieve its potential.

Domestic tourism accounts for 67 percent of the sector and declining mortgage rates and inflation make it more affordable for us to go on holiday, but a strong rand may encourage more South Africans to travel abroad.

It seems ironic that the world's most productive countries, such as China, steadfastly refuse to let their currencies appreciate depite desperate calls from the US, while our currency does the exact opposite.

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