“The Coming Major Bull Market in Rare Earths!”

(Originally published in The Dines Letter - 4 September 2009)

Latest from “The Original Rare Earth Bug” (DIREEBUG): China Reveals Its Hand!

Discovery consists of seeing what everybody has seen and thinking what nobody has thought.

—Albert von Nagyrapolt, The Scientist Speculates

In England, after the days of William the Conqueror, the function of an executor became to determine whether a person who died had sufficient assets to pay his debts and legacies, which was known by the Old Anglo-French legal term aver assetz, from aver, to have, and assetz, sufficient. In other words, having sufficient to meet the claims. While the term has evolved in modern French to avoir assez, the old legal term developed into the English word assets.

As we ponder how to advise the placement of investment funds these days, we find ourselves influenced by the fact that paper money is being created with frightening overabundance. We must realistically confront the likelihood that that much paper would cheapen paper-based assets. Accordingly, our Order of Battle has been to focus on hard assets, such as wealth-in-the-ground metals, because they cannot be overprinted duplicitously. Metals appear to be an attractive investment arena, especially our favored targets: precious metals, uranium and Rare Earths.

Rare Earth metals are our latest favorite because they are essential in upcoming growth areas, yet supply has been increasingly constricted by Chinese producers who control perhaps 97% of world production. We have repeatedly called attention to this situation in recent issues of TDLs (The Dines Letter) and, in fact, our IWB (Interim Warning Bulletin) of 4 Jun 09 was headlined “TDL Blows the Whistle on China’s” 97% monopoly on Rare Earth assets. Our last TDL (14 Aug 09) reiterated that China was slowly choking off exports of Rare Earths, and predicted that those metals would eventually be consumed entirely in China, with nothing exported to the world. We have been dismayed that the rest of the world was not paying attention to the crucial importance of Rare Earths, and we did our best to awaken the West too busy dozing in the sunshine to care. Our last Dines Letter took effect on Monday, 17 Aug 09 but, on the very next day, Tuesday, August 18th, China’s Ministry of Industry and Information Technology shocked the mining world by proposing to halt all exports of five of the seventeen Rare Earths!* Stocks of Rare Earth miners leaped higher on the news, and we were gratified that we got our loyal, long-term TDLrs into those stocks before others were alerted to the situation. Indeed, it is better to drink upstream from the Herd than downstream.

One TDLr inquired whether China was prompted to hurry its curtailment of Rare Earth exports because of our IWB’s whistleblowing, but how could a mere newsletter affect an emerging superpower? In any event, China’s announcement was a wakeup call equivalent to a bucket of ice water on the heads of the press and some world leaders, ranging from Japan threatening to bring China before the World Trade Organization, to a prominent American military man brushing off the news as unimportant because such small amounts of Rare Earths are used for military purposes.** Closer to reality, an article on Rare Earths appeared in the New York Times on 1 Sep 09, to its credit, no less than on the front page of the business section(!), and if that doesn’t start to awaken the world, what would?

While China’s announcement was bullish for stocks of Rare Earth miners outside China, we still do not perceive a full-scale recognition that those who are running around talking about how many windmills and electric cars they plan to build comprehend that that ain’t going to happen without a lot of Rare Earths. (As examples, each Toyota Prius cannot be built without 65 pounds of Rare Earths, while a 3-megawatt windmill must have around 700 pounds of neodymium.) That horrifying “moment of recognition” should eventually bring Rare Earths to the front page of many other news sources, and we still predict that it will be in blaring headlines.

Turning to the Rare Earth stocks, they are in classic Uptrends so we would be in no hurry to take profits yet. Many investors who were shell-shocked by the 2008 Crash are understandably eager to immediately nail down any winnings. Sometimes a champion boxer’s first defeat mars his ability in subsequent battles because of intimidating emotional scars. However, our Secrets of High States book was deliberately provided to you to heal that, otherwise an investor could become overly wary and thus be too easily frightened out of a Major Uptrend. A crash on the level of what happened last year seems to happen only once a century, and it is crucial for the serious market student to get past that and recognize that not every dip is going to lead to a crash. We still believe that the big money to be made in the stock market is by being invested in as large a portion of a Major Uptrend as possible, understanding that getting in anywhere near the Bottom and out anywhere close to a Top is enough to be very lucrative in building your assets. Accordingly, we ourselves are in no hurry to take profits, except small amounts might be taken off the table on the way up, hopefully sufficient to get your original investment back and after which you will be playing only with the amount of your remaining profit.

We believe it is still very early in the Rare Earth Major bull market, not yet even at the stage where the large brokerage houses are devoting at least one full-time Security Analyst to the area, much less a mutual fund specializing in such stocks.

Nonetheless, since there are no “sure things” in the stock market, we likewise seek to protect you by studying what might go wrong in what seems to be a very exciting prospect for increasing your assets. One concern might be the World Trade Organization forcing China to continue its exports, but we consider that outcome unlikely since China could truthfully claim it intends to use Rare Earths to build its own windmills, electric cars, and solar panels, thus legitimately taking care of its own needs first. Or, there might be another stock market crash of the kind that drags everything down, as those who need money sell whatever is saleable to raise sufficient cash to meet margin calls. That’s what happened to gold, silver and uranium stocks last year: the metals held up well while their mining stocks were sold with other stocks “just for the money.” Gold, silver and Rare Earth shares are already recovering, so uranium shares should be next.

Which brings us to the question of the nature of this year’s rally, a decision we have been postponing. We turned bullish on metals in our Interim Warning Bulletins last October and November, and the rest of the market with our Interim Warning Bulletin’s “Buy” signal effective on 2 March 09, near rock bottom for both respective markets. But how high they were to go, since we don’t have tomorrow’s newspapers, is a question that we struggle with daily, and now begins time to take stock – so to speak.

* The proposed export ban included dysprosium, lutetium, terbium, thulium and yttrium, some of which are monopolistically produced only by China.

** For want of a nail the shoe was lost, for want of a shoe the horse was lost; and for want of a horse the rider was lost; being overtaken and slain by the enemy, all for want of care about a horse-shoe nail. Benjamin Franklin, Poor Richard’s Almanac

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