Commodities are once again on a tear.
Gold has been surging, and is closing in on $1,800 (U.S.) an ounce. Crude oil is trading comfortably above $100 a barrel, and even better for commodity bulls, there is pain at the pumps for drivers, with gasoline prices in many parts of Canada around $1.30 a litre. Copper , the metal with a degree in economics, is within striking distance of $4 a pound. Corn, soybeans, wheat – practically everything in commodity land is enjoying buoyant prices.
Can these good times continue?
For answers, we turned to one of Canada’s best known commodity gurus, Donald Coxe, strategy adviser to Bank of Montreal. He is the guiding light behind two commodity-focused closed end funds that trade on the Toronto market, one specializing in agriculture, the other in a wider range of materials that also include precious metals, base metals and energy.
Despite the recent runup in prices for many materials, Mr. Coxe is convinced commodities have the wind at their back and are in what he’s taken to calling “the greatest commodity bull market of all time.”
You’ve been a table-pounding bull on commodities for the past decade. With this long of a run, is the theme still a good bet?
Why do I think it will continue? Well, it’s because of Newton’s law, which says when something is going in a direction it will continue going there unless something comes along to force it to change. And what’s going on in the leading Third World countries is, in a compressed time frame, the story of what happened in North America when it came to challenge and eventually surpass the wealth of Europe. We’re still in the early phase of this big change. In these countries, as people go from having an income of $400 a year to an income of $4,000, the result shows up in the price of commodities. It’s the reason corn has gone from $1.50 to $6.50 a bushel – because people can afford a higher protein diet.
Could the commodity bull market survive a hard landing in China?
It would survive, but it would be painful.
What signs would show a top in the commodity sector?
It will be over in commodities when we have price-earnings ratios on the leading commodity stocks that are higher than the broad stock market, which will mean that there has been a gigantic sea change in opinion and there are no skeptics left. Right now, they’re at a huge discount to the market and we have the bizarre situation that among the mining stocks, they are doing far worse than the metals themselves. Therefore, that means the market is giving negative value for all the risk and effort involved in extracting, refining and delivering the product. These are still deeply undervalued situations.
Could you comment on the money printing by central banks through their various quantitative easing programs and its impact on commodities?
There is no question in my mind that what we’re seeing now is something that an earlier generation of gold enthusiasts would have said: “If that happens, the price of gold will be infinite.” In the last four months the club of the unlimited printers of money has trebled, so we’ve gone from the Fed being the only one, with some help from the Bank of England, to the European Central Bank and the Bank of Japan. What we’re having is an unbelievable amount of paper money being created.
You’re bullish on gold, but recently the Oracle of Omaha, Warren Buffett, dismissed gold in favour of productive assets. Why is he wrong?
The Oracle, remember, lived a large part of his life when it was illegal for Americans to own gold, and Ben Graham, his mentor, lived nearly all of his investment life at a time when it was illegal. It was not an option, so what he did was develop the theory of free cash flows from companies, and of course there is no free cash flow out of a bar of gold. But remember that he slipped from his virtue back in the 1990s and took a big bet on silver, which isn’t even a pure monetary metal and lost money on it. So he’s been repenting that ever since, and ridiculing anybody who would buy gold.
Over the 40 years ending last August, you would have been better off owning a bar of gold than owning the S&P. That shows you that gold is gradually working its way back into legitimacy. It’s not just a thing for paranoids and so forth. What’s happening is that central banks are basically throwing caution to the wind because they are so terrified about the economy. Everyone now who has wealth to protect should have something in gold because things could go seriously wrong.
Which types of commodities do you think will perform best?
I have an inbred bias to agricultural commodities because they’re the only commodities where they get totally consumed and there is never scrap. My belief is we’re still faced with a global food crisis. Right now, things are looking better for supplies of crops, but we’re depending on the weather. I believe oil prices are too high, relative to consumption, but we have the threat of [war]in the Persian Gulf, so that’s naturally putting a bid onto oil. As for the base metals, they’re tied to economic growth but it looks as though we’ve got supply and demand well balanced.
How high can gold go?
I have recommended that gold be capped at around the $2,000 level, by governments who have it, to use to back their bonds. That would mean the gold mines would be a good investment. If we’re talking about $3,000 gold or something, I’m telling you that’s going to be a very bitter world to be in.
The Coxe Global Agribusiness Income Fund is loaded up with tractor makers or dealers, such as CNH Global, AGCO Corp., and Rocky Mountain Dealerships. What’s the big allure with farm machinery?
There are only about five farm machinery companies in the world with scale, with good technology and that have the big precious asset that isn’t on the balance sheet, dealers. I believe that they have, in effect, an oligopoly. I like the fact that these are real, global companies.
These are sophisticated pieces of equipment. When you’re talking about a harvester now, the starting price is $250,000 for one of these things. So I think, with the greatest respect, to refer to them as mere tractor makers is a bit unfair.
The largest individual stock holding in your agriculture fund is Tate & Lyle. What’s to like in a sugar company?
Tate & Lyle has been around for more than a century. They produce a whole range of things out of sugar. They make [low calorie sweetener]Splenda, a very high margin product. They pay a terrific dividend. It’s an extremely well managed company.
Is it a good time to take a plunge on commodity producing stocks?
I believe that there are bargains now in stocks in a way that there haven’t been for some time. My experience has been since this commodity boom began that they don’t stay bargains for long. Their market capitalization is still relatively small, relative to the overall market. The big surprise could be how well these stock do this year, even if the price of the metals and the price of oil doesn’t go up much from where it is.
This interview has been condensed and edited.