Two more points on Jim Roger’s speech the other day at Zinc, down Yarra-way in Melbourne. “Water is one of the things that could derail China,” Jim said. It’s true. We hadn’t thought of it that way before. But aside from what you have in your toilet and shower, the vast majority of water use is industrial and agricultural. Conserving at home makes you feel better. But when you begin to drill down into the story, you realize how much of the food you eat and the products you use on a daily basis (including petrol) include water as an input. Without it, a lot of economic activity dries up.
Second point, for the resource bull skeptics (not that there are many). The last four years have already been pretty good to Aussie resource companies. How can Jim or anyone be sure that the next 7 to 15 will be just as good or better?
Well, no one can be sure. But Jim’s main point is that you had a twenty-year bear market in investment in productive capacity in commodities. It takes time and money to bring new mine production on stream. As BHP is proving at its Ravensthorpe project, the cost of new mines is rising even faster today than just a few years ago. Energy inputs are volatile. And all of this assumes you will find what you are looking for. Jim also pointed out that seventy five cents of every exploration dollar in the mining industry is looking for gold, which makes sense given that gold is going up relative to the dollar.
A third point we add on the fly is that commodities as an asset class may just now be on the leading edge of the institutional liquidity that’s boosted property and equity markets. This comes via the equitizing of commodities. On cue, we learn that Goldman Sachs (NYSE: GS) has sold its benchmark Goldman Sachs Commodity Index (GSCI), to Standard and Poors.
“A well-diversified portfolio now routinely includes exposure to commodities, as investors seek ways to reduce risk, preserve capital and generate alpha,” S&P managing director Robert Shakotko explained to the world yesterday. “The Australian market, which has a strong historical interest in this asset class, should be well served by this acquisition,” said S&P’s director of index services Jason Hill. Heads nod in St. Kilda.
The GSCI tracks 24 commodities and has about US$60 billion in institutional money that tracks it. Expect that number to go up as the S&P popularizes the index. These days people quote the Dow, the S&P 500, the ASX/200 and the Nasdaq. You’ll know the commodity bull market is over when the S&P Commodity index is the first quote on the evening news and the Dow is an afterthought. Then in will be time to buy Dow long-dated Dow calls. But that’s a good twenty years away by our reckoning.