Money & Markets: The next technological boom: rare earths

One of my many investment rules is: beware of investing in anything where the name of the thing doesn’t make sense or it is basically wrong. It’s not a ban on investing, because one thing that can happen in a misnamed category is that it can go sky high because the bulk of investors simply don’t know what they are buying into, and that is a significant cause of bubbles. Lack of ability to understand leads to inability to price correctly, which in turn can, sometimes but not always, lead to FOMO (fear of missing out) where people pile in just because everyone else is.

This is, of course, subjective because ‘multimedia’, for example, which was a boom bubble in the '90s, was to me about the application of a single media type not about multimedia at all, but many will still look at the single embracing media and call it multimedia because the content, which is not the media after all, comes from various areas. It’s semantics, but in investing that can carry serious consequences.

The next boom coming up is going to be such a misnomer: rare earths (REs).

REs are questionably not earth and they are not rare – rather they are hazardous to extract. You can say gold is rare and, for example, China produces 100 times as much RE as it does gold. Perhaps rare earths should instead be called ‘scarce minerals’ and as such would give investors a better initial view on what comes next.

I most likely do not have to tell the audience for this article that the importance of rare earths in the global economy is accelerating rapidly. The 17 chemical elements that are collectively called rare earths, together with other exotic elements, are crucial to keeping our society running smoothly. They are quickly becoming the breakthrough materials for whole new generations of key technologies, from the screens on electronic devices and powerful magnets used in computer hard drives, to camera lenses and GPS equipment.

They are also becoming the key to a whole chain of value-added economic activity, because if you do not have access to these technologic ingredients then you can’t build a pyramid of new technology and its resultant IP.

It remains the case that rare earths and many other exotic elements cannot currently be widely sourced; for example a large proportion of the world's current supply of rare earths comes from China. This terrifies many policy wonks, and countries in the west are starting to wake up to the fact that they need strategic reserves of rare earths and other metals if they are to secure their prime directive of providing security, or in this case economic security.

The trend for increasing rare earth demand is not going to go away, and as such a boom is in the offing and I assume there will be a bubble to follow. This is already unfurling in equities but it is only the beginning. The whole renewables sector that also will only get bigger will drive exotic metals in the same way as it is driving palladium and other platinum group metals on a cycle that is set to run for years.

Investors looking to buy into the physical metals are probably not taking the easiest route because owning metals is a very inconvenient way to profit from this trend, while the stock market provides access at the click of a mouse.

Here are some of the ways to play rare earths and other exotic metals:

1. Major miners of these materials will prosper. Miners have done well but it is highly likely that miners will be lifted not only by the popularity of their product but also by the high likelihood of strong inflation over the next few years.
2. Resources explorers will explode and crash and explode and crash. This is what the speculative end of resource stocks do. Never believe a word of what they announce, but for pure wild upside and vertiginous downside, mining exploration stocks have enthralled the share gamblers for a couple of centuries.
3. Exchange Traded Funds (ETF): These are shares where the operator of the ETF actually holds the physical metal, or group of metals, or stocks involved in that theme, allowing the investor to get exposure to the underlying asset which will closely track the price of those assets. It’s a cheap way of buying into a portfolio of a certain type of risk and perfect for most investors to get their piece of the action.
4. IP companies. Companies that specialise in technological exploitation of rare earths will enter the market at the boom stage and they will likely flourish while the boom is on. They will also be volatile but unlike established players they will boom higher before falling harder.

The way to play boom-bubble-bust cycles is to get in early, ride the boom and bubble and then get out and walk away. Get in and out early; this is so much better than getting in and out late. The hardest thing is to get out early because you have to sit and watch all those profits you didn’t make float by but in the end you’ll get used to it and note that at some point soon after you are much better off than those holding on singing the praises of an asset that they clearly don’t understand is in a bubble.

Exotic metals are starting to boom and will bubble, and it’s just the beginning of a cycle where technology will drive the price and miners will scramble to fill the demand. That scramble will catch up but it will take a lot of time and there is a lot of money to be made as an investor providing liquidity for that process.