Jim Rogers on the Latest Commodities Plunge

Speaking with Alix Steel of TheStreet, yesterday, legendary commodities trader Jim Rogers said he isn’t buying into Wall Street’s popping commodities bubble thesis following the sharp sell-off in all commodities last week, especially those two commodities most widely watched recently—silver and oil.

Instead, Rogers said he’s “delighted” to see the massive sell-off in commodities prices—and in the case of the silver price, “was hoping it would go down” so he could buy some more of the white metal—a precious and monetary metal, whose price has still not achieved an all-time high to match gold’s multiple all-time highs first achieved in January 2008 with a $857 per Troy ounce closing print.

In all, the 68-year-old commodities market version of Warren Buffett has routinely stated that swooning corrections are normal occurrences during commodities bull runs—runs that grossly outperform stocks to the upside, downside and volatility.

And what does Rogers think of the latest across-the-board price plunge?

“Well, not much if you ask me. Markets correct all the time,” Rogers told The Street. “Silver went down a great deal but if you raise margin requirements 150%-200% you would expect there’s something to collapse. It’s good for the market as far as I’m concerned. Silver especially needed a set back and a consolidation. I’m delighted to see everything.”

Buyers who consume every day commodities, such as food and energy, don’t cheer during bull market rallies in “things,” so it’s natural for Wall Street to play down, or even attack the complex with negative comments and impromptu regulation changes, as witnessed by the Chicago Mercantile Exchange’s five margin requirement hikes within eight trading days in the silver market.

The prevailing view of financial commentators and their guests is that the sharp drop off in commodities is good for the world economy and, therefore, good for stocks.

Moreover, calls for bubbles in silver and oil prior to the CME’s coordinated attack on the silver market (and now, the oil market) created a scenario that can easily be spun as evidence of a finally-pricked bubble. Therefore, the crowd should move back into stocks now that the menace of escalating input costs, rising consumer goods prices as well as weaker consumer spending thereafter have now been dispensed with quickly, so goes the logic.

Rogers sees it differently, however.

“I hardly see how silver could be a bubble when, even at its top, it’s still below it’s all-time high,” Rogers explains. “That’s not much of a bubble. A bubble is when things are screaming up every day and they go to new highs, two to three times their old highs. We’ll have a bubble, we’ll have a bubble in commodities, we’re not there yet.”

In fact, when asked about any sales he’s made within his vast commodities holdings, Rogers said, “No, no, no I have not sold any commodities.”

“Insufficient silver to meet the settlement,” says Rick Rule

In a startling interview on King World News yesterday, Rick Rule told KWN’s Eric King the suspicion surrounding COMEX inability to settle the March and subsequent nearby contacts could be justifiable.

“There has been so much physical buying that it’s widely reported that the mints are having difficulty obtaining coin strip in the face of overwhelming coin demand,” said Rule. “There has been suspicion with the March settlement and with subsequent near-term settlements that there will in fact be insufficient silver to meet the settlement requirements in those near month futures contracts.”

Rick Rule, founder of Global Resource Investor, now part of $9 billion Sprott Asset Management, suggested that global investors seeking haven from an unprecedented coordination between central banks to devalue its respective currencies have turned to gold and silver as a final refuge.

It should be noted that today’s currencies of choice, the Swiss franc, Canadian dollar, Aussie dollar, Brazilian real and Malaysian ringgit are tiny markets struggling to offset the onslaught of newly created dollars by the U.S. Federal Reserve into the global monetary system.

Most recently, central bankers of these currencies have been watching export data especially closely during the dollar’s plunge below the 78 level in the USDX for signs of slowdown in vital industries and employment within their respective economies.  Too much tightening hurts demand for exports, whereas too little tightening exposes consumers further increases in the rate of change in consumer prices without the mitigating effect of a strong currency against the global commodities complex priced in U.S. dollars.  Gold and silver, Rule said, are “without a political constituency for devaluation.”

“It is true the dollar is the world’s reserve currency so it’s the fiat currency that everybody is reserving special wrath for, particularly in view of the profligate nature of US debt issuances,” Rule continued. “But there’s a bigger problem with regards to fiat currencies that people have, because if you are going to somewhere other than gold, what is the fiat haven? I don’t see a fiat haven, and that’s problematic.”

If there was any doubt of today’s silver market once again proving the principles of Gresham’s Law (also known as, Copernicus-Gresham Law) cannot be denied forever, a plausible explanation for a remarkable 144% rise in the silver price from the Jun. 7, 2010 low of $17.22 would soon be forthcoming from Fed chairman Ben Bernanke.

But, alas, Bernanke won’t be cornered into Gresham’s argument.

“I don’t fully understand movements in the gold price,” Bernanke said on Capitol Hill in early June 2010. Ditto, of course, for an explanation for the rise in gold’s kissing cousin, silver, which historically takes center stage with its breathtaking moves in previous capital flights out of the U.S. dollar—post Brenton Woods.

According to Wikipedia, “Gresham’s law states that any circulating currency consisting of both ‘good’ and ‘bad’ money (both forms required to be accepted at equal value under legal tender law) quickly becomes dominated by the ‘bad’ money. This is because people spending money will hand over the ‘bad’ coins rather than the ‘good’ ones, keeping the ‘good’ ones for themselves.”

Fears of the U.S. entering a full-scale, third war in Libya; the effects on global markets post a bona fide end to QE2 in June; another financial blowup in Europe (this time Spain); a business-as-usual approach to a fiscal 2011 $1.6+ billion deficit in Washington; Japan; further oil price shocks; or a combination of any of these are driving an increasingly jittery investor into taking the plunge into an asset class which has been out of favor for more than 30 years.

And since silver’s tiny $75 billion market remains the smallest against all competing legal tender “currencies” (none of which, is backed by gold or silver bullion; the Swiss franc came off the gold standard in 1999) near-panic demand is overwhelming available supply, suggesting further increases in the silver price may be needed to induce potential sellers to meet current demand for the metal.

“Well I think part of what’s happening in the silver market is the fact that the market is in backwardation which is to suggest that the spot price is ahead of the futures price,” Rule explained. “This is the opposite of a contango which is what normally what happens in metals markets.  It is obvious that there is incredible tightness in the physicals market.”
“It’s obvious from those statistics that the near-term silver supply, in particular the physical supply, is extremely tight, and as a consequence of that extremely volatile…We’re in an extraordinarily tight market.”

 

At 9:55 a.m. (EST) spot silver trades at $42.54 per Troy ounce, up $0.89, or 2.13 percent.