Two Lessons on China and Commodities From Legendary Investor Jim Rogers

Maybe not tomorrow, but eventually, China will devalue its currency. And prices for uranium and coal and other undervalued commodities will recover. That's because, in the end, markets always win.

That's the application of some of the sage advice from the books of legendary investor Jim Rogers. Rogers co-founded the Quantum Fund, one of the world's most successful hedge funds, in the early 1970's. He quit full-time investing in 1980 after generating returns of 4,200% over 10 years.

(I recently had a chance to interview Jim Rogers to get his thoughts on everything from gold to China to real estate. You can download the full interview here.)

Afterwards, he traveled the world several times, and he wrote about his experiences. Those books include Investment Biker and Adventure Capitalist, investment tourism books that are must-reads for anyone interested in global markets.

I found a few important lessons that are relevant to today's investment markets while re-reading parts of Rogers' books (including his more autobiographical book, Street Smarts). Here are some of those lessons:

1. Central Banks Will Always Fail to Control Prices (from Investment Biker, 1994)

"In all my years in investing, there's one rule I've prized beyond every other: Always bet against central banks and with the real world ... Central banks and governments always try to maintain artificial levels, high or low, whether of a currency, a metal, wool, whatever. Usually these prices are absurd, and the market knows they're absurd. When a central bank is defending something -- whether it's gold at thirty-five dollars [when the U.S. used the gold standard] or the lira [Italy's old currency, before the euro] at eight hundred to the dollar -- the smart investor always goes the other way. It may take a while, but I promise you you'll come out ahead. It's a golden rule of investing."

China's renminbi is a prime example of this today. The Peoples Bank of China, China's central bank controls its currency's exchange rate. It's only a matter of time before the central bank is forced to allow the renminbi to decrease in value. We've written about this before, and Jim Rogers has told us the same thing. Nearly every central bank that attempts to control its currency must eventually give in to market forces. This has especially proved true in recent decades.

Many investors worried that the renminbi was going to drop very suddenly last January. As it turns out, it didn't. So, talk of the renminbi's depreciation is no longer making headlines. But just because business journalists have stopped talking about the renminbi doesn't mean the issue has gone away. Global markets will continue to react to uncertainty over the Chinese renminbi until the currency is allowed to trade freely.

2. Commodity Prices Rise and Fall (from Street Smarts, 2013)

"The cure for high prices is high prices. It always works ... The truth is that commodities are actually simpler to figure out than stocks. Nobody can understand IBM, not even the chairman. IBM has hundreds of thousands of factors -- employees, products, parts, suppliers, competitors, governments, balance sheets, and unions -- that it has to deal with. Cotton, by contrast, is pretty straightforward. All you have to know about cotton is this: Is there too much cotton or too little cotton? Cotton does not care who the chairman of the Federal Reserve is. The head of IBM has to know and care about such things. Cotton: Is there too much or too little? Now, figuring that out may not be easy at all, but the question itself is simple, and in the end it is the only question with which you have to be concerned."

We often talk about commodities such as copper, silver, gold, natural gas and oil. The discussion of where any commodity price is heading usually boils down to basic supply and demand.

Price levels that are too high will cause an imbalance in either the supply or the demand. The price of the commodity will then correct downward. The same principle applies for price levels that are too low.

Put simply, the solution to high prices is high prices, and the solution to low prices is low prices. This self-correction may not happen immediately, but it will happen.

These two pieces of advice are worth reflecting on. They can help you to see through the noise, both in the market and in the financial media. They have helped Jim Rogers earn his fortune, and they can help you too.

(To read more of Jim Rogers' thoughts on oil, U.S. markets and bonds, please click here to download our exclusive interview with this investing legend.)

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

Kim Iskyan is the founder of Truewealth Publishing, an independent investment research company based in Singapore. Click here to sign up to receive the Truewealth Asian Investment Daily in your inbox every day, for free.

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