Email of the day (1)
Comment of the Day

May 11 2011

Commentary by David Fuller

Email of the day (1)

On GS's rare earths report:
"Goldman Sachs recently circulated a note warning of a surplus in rare earth metals from 2013 onwards. There has been a significant correction in these stocks since the note.

"Since you have long term investments in this sector, I was wondering what your thoughts are pursuant to the GS note!

"Unfortunately, I do not have a copy of the note but I am sure you would have read several reports about the same."

David Fuller's view Forecasts of a surplus in 2013 for one of the more tightly controlled "supply inelasticity meets rising demand" stories, to repeat Fullermoney's key description for this commodity cycle since 2003, requires either a vivid imagination or advance knowledge of a hypothetical U-turn in China's current policy of export restrictions for rare earths metals.

I suspect it is the former and I am sure Goldman Sachs would love to see another cheap buying opportunity in rare earths mining shares. Wouldn't we all!

As a general comment and not one directed specifically at the above mentioned trading house, I think many investment firms attempt to game the markets in ways that are probably legal, if not necessarily ethical.

An insufficient number of non Chinese rare earths miners and refiners will be producing enough refined ore in 2013, in my opinion, to offset today's shortages at a time of rising demand.

Therefore, we could only see a surplus of rare earths supply in the next few years for the following reasons: 1) China removes its export restrictions (this is the big one but why should they?); 2) Substitution, in the event that commercial supplies of graphene or some other miraculous substance replaced rare earths metals at an acceptable price (2013 seems way too soon for this); 3) A disastrous economic slump curbed global demand (this risk was overstated in 2008-2009 and I do not think it is a big threat for the next two years, although another energy spike could induce recession in some countries).

The biggest threat to rare earths mining shares, in my opinion, is the possibility of another sharp decline in stock markets. Most markets are volatile and this could occur in the event of sharply higher commodity prices, monetary tightening (inevitable at some stage), more 'Arab uprisings' or a series of unanticipated black swan events.

Conversely, I would not rule out the possibility of a considerably more benign environment for global stock markets, in which commodity prices ease or range sufficiently to reduce cost pressures, monetary policy remains mildly accommodative and an economically healthy level of GDP growth resumes its supercycle trajectory.

Subscribers should be prepared for any of these possibilities, some of which we will be able to anticipate in a timely fashion and others which will catch us by surprise.

The tactic is to buy-low-and-sell-high, in the markets which you favour for secular thematic and valuation reasons, supported by technical evidence on the charts.

Rare earths miners will remain exceptionally volatile, being thinly traded, and mostly without production and earnings to date, not to mention yield. However, they remain a particularly interesting speculation, in my opinion.

Here are some related articles:

Goldman Sachs: Wrong Again…

In Xanadu Did Goldman Sachs Decree A Rare Earths Surplus For All To See [Ed: highly informative]

GTSO: Goldman Sachs Analyst Predicts 'Severe' Rare Earths Deficit

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