Commodity Bull Market Is Near The Beginning

In the twentieth century, commodities markets, both bulls and bears, lasted for cycles averaging 17–18 years. And here’s why.

Let’s say you and I are looking for an opportunity to make money. We do our homework, and we notice that lead is extremely cheap. On the face of it, lead might seem to be an asset whose time has passed. If you walked into a room in any major urban area in the U.S. and found a politician, a used-car salesman, and the owner of a lead mine, nobody would speak to the mine owner.

He’s in one of the most politically incorrect and least fashionable businesses in the world. Lead paint in old buildings continues to poison children; toxic lead residue in the air from leaded gasoline had been poisoning us all. And now that lead is no longer in either gasoline or paint, demand for it has dropped precipitously, and as a result maybe one lead mine has opened in the past 25 years.

But our investigations into the lead business have convinced us that there is still plenty of demand. These days, most of the available lead is used for “lead-acid batteries,” the kind of battery you have in your car or truck. And with increasing economic growth in the world’s two most populous nations, tens of millions of Chinese and Indians are beginning to trade their bicycles in for motor scooters, cars, and trucks that require these batteries, demanding more and more lead.

The existing lead mines are bound to be running out. Mines do not last forever. And neither do existing inventories, if they are not increased. With supply down, and demand likely to rise—only 4 percent of those 1.3 billion Chinese own cars—lead looks like a good bet.

Better still, lead is cheap. Therefore we’re going into the lead business.

It will, however, take some doing. First, we have to find a new lead deposit—no easy task. But we luck out and find a major new source of lead.

Now we must go to Wall Street to raise the money to build our lead mine. Investors are cool to our proposal: They will give us zillions for an information technology start-up, but no one is interested in anything as “old economy” as a lead mine. But we’re persistent, and we finally raise enough money to go into the lead mining business with the help of a smart venture capitalist who also sees the prospects in lead.

In fact, by now lead prices may be creeping up. Of course, we have to get government permission, and then there are the environmentalists to cope with. Brilliantly, we move through the bureaucracy and satisfy the environmental concerns—but we’re still a long way from producing lead.

The deposits we found were in the middle of nowhere, and we will have to build roads through the wilderness; we will, in fact, have to create a sizable infrastructure to support this mining venture, from the world headquarters of our mining firm to the trucks, construction workers, miners, and the cabins where they will live. That infrastructure takes time.

But we make it happen, and eventually, years later, our mine is on stream, and we’re mining lead, finally.

You cannot, however, take lead from the ground and put it directly into an automobile battery. You need a smelter. But nobody has built a smelter since years before the last lead mine was dug. And if the environmentalists were opposed to the opening of your lead mine, they’ll be ready to do battle at the mention of smelters.

Smelters are miserable places that spew toxic smoke into the air, and nobody wants one within miles of them. But we find an area nearby that is desperate enough for jobs to put up with our smelter. Now we have to find the money to build it!

And so it goes.

In the meantime, as we’re racking up the years and the millions to get into the position to make money meeting that increasing shortage of lead we spotted years ago, prices have risen exponentially. The demand is on us—and everyone has noticed that lead is a smart market in which to be. Suddenly, others are trying to find lead and build mines. They, too, will have to go through the long, drawn-out process of making it happen. And lead prices will keep going up, no matter what. The world’s vehicles still need their lead-acid batteries.

That is what makes bull markets in commodities last for so long. Conversely, once all the new lead mines come on stream, their owners will be mining as much lead as they can to take advantage of the high prices and demand. The new mines have to pay back their financiers. Eventually, however, warehouses will be filled with lead, more than is needed, and the prices will move downward.

It will take years to use up all that capacity and the price of lead will go nowhere—which means that a bear market is under way. That bear market, in turn, will last for years, until the existing mines become depleted.

Luckily, we are now at that stage where, after a long bear market in metals, capacities are down, while demand worldwide has grown. Companies are beginning to realize that it’s time to get back into the mining business. Meanwhile, we investors have a decade or more to ride the rise in prices before the new mines come on stream and capacities get high enough to push prices back down again.

Every single commodity traded takes time to be found, grown, produced, and shipped. Exploration and production for energy products and minerals take decades. Oil was discovered in the North Sea in 1969; North Sea oil went to market in 1977. Alaska’s North Slope oil was discovered in 1968, and took nine years to get to market. Even a 1,200-pound steer takes more than two years from conception before it is “finished” and ready for slaughter; one coffee tree takes three to five years to grow to fruition. That is why bull markets in commodities last so long:

When supplies of things are allowed to become depleted without increasing new capacity, it takes time even to recognize the change, much less to get production up to the point where it can meet demand.

So give commodities some respect—and take advantage of them as a potential investment. That they are riskier than stocks or bonds is bunk—pure myth that has finally been demolished. Investments in commodities have not just done better than bets on commodities-producing companies over the past 43 years; they have scored triple the returns.

Please tell that to the next financial adviser who warns you off commodities. Better still, you have time to put your toe in and learn as much as you can. The bull market under way will last for years. There’s still plenty of time left—and money to be earned.

Good Investing,

Jim Rogers

- From Hot Commodities

The essay you just read was taken from Jim's recently released third book, Hot Commodities: How anyone can invest profitably in the world’s best market. You can order a copy here: Hot Commodities.

Editor’s Note: Jim Rogers has been described as the Indiana Jones of finance. He’s been around the world on a motorcycle. He’s founded a hedge fund with George Soros, he’s taught finance at Columbia University's business school and he’s written three classic books on investing. He lives in New York City with his wife, Paige Parker, and their daughter, who is learning Chinese and owns commodities but doesn't own stocks or bonds.