By Michael Bolleter
Rare earths, a collection of 17 elements on the periodic table, have been on a tear lately with some appreciating over 600% this year. The rally began with the resurgence of demand for products like hybrid cars, cell phones, and wind turbines that rely heavily on rare earth metals in their production. China, who accounts for 97% of the world’s rare earth metal-oxide production, cut its export quota by 72% igniting a frenzy among speculative investors and companies dependant on the metal. The rally continued when China placed a temporary and unofficial ban on exports during its recent diplomatic spat with Japan.
Bloomberg journalist Elisabeth Behrmannn reported that in the past month alone, the stock prices of the "31 companies tracked by Bloomberg ... that claim a rare earth element in their business is [up] 34 percent, even though only two have reported positive free cash flow."
Companies looking to hedge their material prices and investors looking to profit off of the uncertainty can buy shares in the newly listed Rare Earth and Strategic Metals ETF, REMX. REMX started trading Thursday and is comprised of 24 rare earth metal stocks.
While this ETF may be attractive, investors need to be aware that this ETF holds multiple junior stocks, companies that are in the exploration stage and have not yet turned a profit. Additionally, due to the highly specialized nature of rare earth metals, China's erratic control of production, and the uncertainty of future supply and demand can lead to rapid changes in valuation leading to high volatility.