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Monthly Archives: June 2011

The screaming fundamentals for owning gold and silver

Gold bullion This report was originally published at www.chrismartenson.com.

This report lays out an investment thesis for gold and one for silver. Various factors lead me to conclude that gold is one investment that you can park for the next 10 or 20 years, confident that it will perform well. My timing and logic for both entering and finally exiting gold (and silver) as investments are laid out in the full report.

The punchline is this: Gold and silver are not (yet) in bubble territory, and large gains remain, especially if monetary, fiscal, and fundamental supply-and-demand trends remain in play.

Introduction

In 2001, as the painful end of the long stock bull market finally seeped into my consciousness, I began to grow quite concerned about my traditional stock and bond holdings. Other than a house with 27 years left on a 30-year mortgage, these holdings represented 100% of my investing portfolio. So I dug into the economic data to see what I could discover. What I found shocked me. It’s all in the Crash Course in both video and book form, so I won’t go into that data here.

By 2002, I had investigated enough about our monetary, economic, and political systems that I decided that holding gold and silver would be a very good idea, poured 50% of my liquid net worth into precious metals, and sat back and watched.

Since then, my appreciation for and understanding of the role of gold as a monetary asset and silver as an indispensible industrial metal have deepened considerably.

Investing in gold and silver is still a good idea. Here’s why.

Why own gold and silver?

The reasons to hold gold and silver, and I mean physical gold and silver, are pretty straightforward. So let’€™s begin with the primary reasons to own gold.

1. To protect against monetary recklessness
2. As insulation against fiscal foolishness
3. As insurance against the possibility of a major calamity in the banking/financial system
4. For the embedded “option value” that will pay out if and when gold is remonetized

By “monetary recklessness,” I mean the creation of money out of thin air and the application of more liquidity than the productive economy actually needs. The central banks of the world have been doing this for decades, not just since the onset of the great financial crisis. In gold terms, the supply of above-ground gold is growing at roughly 3% per year, while money supply has been growing at nearly three times that yearly rate since 1980.

Now this is admittedly an unfair view, because the economy has been growing, too, but money and credit growth have handily outpaced even the upwardly distorted GDP measurements by a wide margin. As the economy stagnates under this too-large debt load while the credit system continues to operate as if perpetual expansion were possible, look for all the resulting extra dollars to show up in prices of goods and services.

Real interest rates are deeply negative (meaning that the rate of inflation is higher than Treasury bond yields). This is a forced, manipulated outcome courtesy of central banks that are buying bonds with thin-air money. Historically, periods of negative real interest rates are nearly always associated with outsized returns for commodities, especially precious metals. If and when real interest rates turn positive, I will reconsider my holdings in gold and silver, but not until then. That is as close to an absolute requirement as I have in this business.

Monetary policies across the developed world remain as accommodating as they’€™ve ever been. Even Greenspan’s 1% blow-out special in 2003 was not as steeply negative in real terms as what Bernanke has recently engineered. But it is the highly aggressive and “alternative” use of the Federal Reserve balance sheet to prop up insolvent banks and to sop up extra Treasury debt that really has me worried. There seems to be no way to end these ever-expanding programs, and they seem to have become a permanent feature of the economic and financial landscape. In Europe, the equivalent would be the sovereign debt now found on the European Central Bank (ECB) balance sheet.

Federal deficits are seemingly out of control and are now stuck in the -$1.5 trillion range. Massive deficit spending has always been inflationary, and inflation is usually gold/silver friendly. Although not always, mind you, as the correlation is not strong, especially during mild inflation (less than 5%). Note, for example, that gold fell from its high in 1980 all the way to its low in 1999, an 19 year period with plenty of mild inflation along the way. Sooner or later I expect extraordinary budget deficits to translate into extraordinary inflation.

Reason #3, insurance against a major calamity in the banking system, is an important part of my rationale for holding gold. I’m not referring to “paper gold” either, which includes the various tradable vehicles (like the “GLD” ETF) that you can buy like stocks through your broker. I’m talking about physical gold and silver because of their unusual ability to sit outside of the banking/monetary system and act as monetary assets.

Literally everything else financial, including your paper US money, is simultaneously somebody else’€™s liability, but gold and silver are not. They are simply, boringly, just assets. This is a highly desirable characteristic that is not easily replicated.

Should the banking system suffer a systemic breakdown, to which I ascribe a reasonably high probability of greater than 1-in-4 over the next five years, I expect banks to close for some period of time. Whether it’s two weeks or six months is unimportant; no matter the length of time, I’d prefer to be holding gold than bank deposits.

During a banking holiday, your money will be frozen and left just sitting there, even as everything priced in money (especially imported items) rocket up in price. By the time your money is again available to you, you may find that a large portion of it has been looted by the effects of a collapsing currency. How do you avoid this? Easy; keep some “money” out of the system to spend during an emergency. I always advocate three months of living expenses in cash, but you owe it to yourself to have gold and silver in your possession as well.

The final reason for holding gold, because it may be remonetised, is actually a very big draw for me. While the probability of this coming to pass may be low, the rewards would be very high.

Here are some numbers: The total amount of “official gold,” or that held by central banks around the world, is 30,684 tonnes, or 987 million troy ounces (MOz). In 2008 the total amount of money stock in the world was roughly $60 trillion.

If the world wanted 100% gold backing of all existing money, then the implied price for an ounce of gold is ($60T/987MOz) = $60,790 per troy ounce.

Clearly that’s a silly number (or is it?), but even a 10% partial backing of money yields $6,000 per ounce. The point here is not to bandy about outlandish numbers, but merely to point out that unless a great deal of the world’s money stock is destroyed somehow, or a lot more official gold is bought from the market and placed into official hands, backing even a fraction of the world’s money supply by gold will result in a far higher number than today’s ~$1,500/Oz.

The difference between silver and gold

Often people ask me if I hold goldandsilver as if it were one word. I do own both, but for almost entirely different reasons. Gold, to me, is a monetary substance. It has money-like qualities and it has been used as money by diverse cultures throughout history. I expect that to continue.

There is a chance, growing by the week, that gold will be remonetized on the international stage due to a failure of the current all-fiat regime. If or when the fiat regime fails, there will have to be some form of replacement, and the only one that we know works for sure is a gold standard. Therefore, a renewed gold standard has the best chance of being the ‘new’ system selected during the next bout of difficulties.

Silver is an industrial metal with a host of enviable and irreplaceable attributes. It is the most conductive metal known, and therefore it is widely used in the electronics industry. It is used to plate critical bearings in jet engines and as an antimicrobial additive to everything from wall paints to clothing fibers. In nearly all of these uses, plus a thousand others, it is used in such vanishingly small quantities that it is hardly worth recovering at the end of the product lifecycle — and often isn’t.

Because of this dispersion effect, above-ground silver is actually at something of a historical low point. When silver was used primarily for monetary and ornamentation purposes, the amount of above-ground, refined silver grew with every passing year. After industrial uses cropped up, that trend reversed, and today there are perhaps 1 billion ounces above ground, when in 1980 there were roughly 4 billion ounces.

Because of this consumption dynamic, it’s entirely possible that over the next twenty years not one single net new ounce of above ground silver will be added to inventories, while in contrast, a few billion ounces of gold will be added.

I hold gold as a monetary metal. I own silver because of its residual monetary qualities, but more importantly because I believe it will continue to be in demand for industrial uses for a very long time, and it will become a scarce and rare item.

Scarcity

If we cast our minds forward ten years and think about a world with oil costing 2x to maybe 8x more than today, we have to ask how many of our currently-operating gold and silver mines, or the base metal mines from which gold and silver are by-products, will still be in operation, and how many will close because their energy costs will have exceeded their marginal economic benefits.

After just 100 years of modern, machine-powered mining, nearly all of the good ores are gone. By the time you are reading stories like this next one, you should be thinking, ‘Why are they going to all that trouble unless that’s the best option left?’

South African Miners Dig Deeper to Extend Gold Veins’ Life Spans

Feb 17, 2011

JOHANNESBURG: With few new gold strikes around the world that can be turned into profitable mines, South Africa’s gold miners are planning to dig deeper than ever before to get access to rich veins.

The plans raise questions about how to safely and profitably mine several miles below the surface. Success would mean overcoming problems such as possible rock falls, flooding and ventilation challenges and designing technology to overcome the threats.

Mark Cutifani, chief executive officer of AngloGold Ashanti Ltd., has a picture in his office of himself at one of the deepest points in Africa, roughly 4,000 meters, or 13,200 feet, down in the company’s Mponeng mine south of Johannesburg. Mr. Cutifani sees no reason why Mponeng, already the deepest mining complex in the world, shouldn’t in time operate an additional 3,000-plus feet deeper.

“The most critical challenges for all of us in South Africa are depths and depletion of reserves,” Mr. Cutifani said in an interview.

The above article is just a different version of the story that led to the Deepwater Horizon incident. By the time exceptional engineering challenges are being pondered to scrape a little deeper, it tells the alert observer everything they need to know about where we are in the depletion cycle. We are closer to the end than the beginning.

We are at the point in history where we can easily look forward and make the case for declining per capita production of numerous important elements just on the basis of constantly falling ore purities and gold and silver fit into that category rather handily. Depletion of reserves is a very real dynamic and it is not one that future generations will have to worry about; it is one with which people alive today will have to come to terms.

The issue of Peak Oil only exacerbates the reserve depletion dynamic by adding steadily rising energy input costs to mix. Should oil get to the point of actual scarcity where we have to ration by something other than price, then we must ask where operating marginal mines fits into the priority list. Not very high would be my guess.

Supply and demand – gold

Not surprisingly, the high prices for gold and silver have stimulated quite a bit of exploration and new mine production. With over decade of steadily rising prices, there has been ample time to bring on new production. Which leads to a real surprise: in the case of gold, relatively little incremental mine production has occurred.

The analytical firm Standard Chartered has calculated a rather subdued 3.6% gold production growth over the next five years:

Most market commentary on gold centres on the direction of US dollar movements or inflation/deflation issues – we go beyond this to examine future mine supply, which we regard as an equally important driver. In our study of 375 global gold mines and projects, we note that after 10 years of a bull market, the gold mining industry has done little to bring on new supply. Our base-case scenario puts gold production growth at only 3.6% CAGR over the next five years.

Of course none of this is actually surprising to anyone who understands where we are in the depletion cycle but it’s probably quite a shock to many an economist. The quoted report goes on to calculate that existing projects just coming on-line need an average gold price of $1,400 to justify the capital costs while greenfield, or brand-new, projects require a gold price of $2,000 an ounce.

This enormous increase in required gold prices to justify the investment is precisely the same dynamic that we are seeing with every other depleting resource: energy costs run smack-dab into declining ore yields to produce an exponential increase in operating costs. And it’s not as simple as the fuel that goes into the CaterpillarD-9s; it’s the embodied energy in the steel and all the other energy-intensive mining components all along the entire supply chain.

Just as is the case with oil shales that always seem to need an oil price $10 higher than whatever it currently is to break even, the law of receding horizons (where rising input costs constantly place a resource just out of economic reach) will prevent many an interesting, but dilute, ore body from being developed. Given declining net energy, that’s forever as far as I am concerned.

The punchline of the Standard Chartered gold report is that they think $5,000 gold is a realistic target and go on to note the most important shift in gold accumulation of the past 30 years:

The limited new supply comes at a time when central banks have turned from being net sellers to significant net buyers of gold. The result, in our view, will be a gold market in deficit, even assuming flat growth in demand.

With the supply-demand balance so out of kilter, we see the gold price potentially going to US$5,000/oz.

(Source)

The emergence of central banks being net acquirers of gold is actually a pretty big deal. Over the past few decades central banks have been actively reducing their gold holdings preferring paper assets over the ‘barbarous relic.’ Famously, Canada and Switzerland vastly reduced their official gold holdings during this period, a decision that many citizens of those countries have openly and actively questioned.

The World Gold Council out of the UK is the primary firm that aggregates and reports on gold supply and demand statistics. Here’s the most recent data on official (i.e. central bank) gold holdings:

(Source)

Note that the 2009 data is lowered by slightly more than 450 tonnes in this chart to remove the one-time announcement by China that it had secretly acquired 454 tonnes over the prior six years, so this data may differ from other representations you might see. I thought it best to remove that blip from the data. Also the data for 2011 is for the first four months only, so we might expect 2011 to be a record-setter if the current pace continues.

Overall, world supply and demand are a bit out of alignment right now with supply increasing by 2% last year and non-official demand increasing by 10%:

The summary of the fundamental analysis is that with mine production seriously lagging the price increases for gold, coupled to increased central bank and investment demand, we have set the stage for some hefty prices increases irrespective of any fiscal or monetary shenanigans.

However, once we put those back into the mix, I forecast a quite volatile but upwardly sloping price for gold over the coming years. Possibly a very steep upward slope at points.

Supply and demand, silver

Silver demand is growing by double-digit percentages, being led primarily by industrial uses and investment demand. The Silver Institute does a fine job of tracking and reporting on these matters.

First demand:

Total fabrication demand grew by 12.8 percent to a 10-year high of 878.8 Moz in 2010; this surge was led by the industrial demand category. Last year, silver’s use in industrial applications grew by 20.7 percent to 487.4 Moz, nearly recovering all the recession-induced losses in 2009, and is now seeing pronounced advances in 2011.

Jewelry posted a gain of 5.1 percent, the first substantial rise since 2003, primarily due to strong GDP gains in emerging markets and the industrialized world’s improving economic picture. Photography fell by 6.6 Moz, realizing its smallest loss in nine years, as medical centers deferred conversion to digital systems. Silverware demand fell to 50.3 Moz from 58.2 Moz in 2009, essentially due to lower demand in India.

(Source)

Now Supply:

Silver Production 2010

Silver mine production rose by 2.5 percent to 735.9 Moz in 2010 aided by new projects in Mexico and Argentina. Gains came from primary silver mines and as a by-product of lead/zinc mining activity, whereas silver volumes produced as a by-product of gold fell 4 percent last year.

Mexico eclipsed Peru as the world’s largest silver producing country in 2010, and Peru is followed by China, Australia and Chile. Global primary silver supply recorded a 5 percent increase to account for 30 percent of total mine production in 2010.

Again, we are comparing double digit demand increases against low single digit supply increases. After a decade of rather dramatic price increases for silver, the alert observer should be asking exactly why this is the case.

In table form, we can clearly see that the silver balance for the world requires both dishoarding from government stockpiles and from the recycling of scrap silver. That is, shortfalls from mining have to be made up from above ground stocks:

There’s only so long that such an imbalance can continue before the shortfalls require much higher prices to cool off demand.

One of the reasons that I originally invested quite heavily in silver is precisely because I came to the conclusion that the price was far too low, artificially so, and that it would therefore be a great investment. So far so good.

Given the above fundamentals, I project that prices for the precious metals will be many multiples higher – in today’s dollar terms – by the end of the decade.

Part II of this report: How to Play The Greatest Gold & Silver Bull Market Of Our Lifetime delves into the specifics of how much of your net worth to invest and in what forms, what price targets gold and silver are likely to reach, and what indicators to look for that will indicate it’s time to sell out of your precious metal investments.

Rare earths mining may chip away at China’€™s hold on high tech gear

ELK CREEK, Neb.,€” Each new 3,000-foot hole bored into the rolling hills of southeastern Nebraska potentially drills away at a troubling Chinese monopoly.

The drills pull up cylinders of rock in search of exotic minerals like neodymium, praseodymium and ytterbium.

Those “rare earths”€ are critical ingredients of your car’€™s catalytic converter and your computer’€™s flat-screen display, of smart phones and smart bombs. They make your Prius purr and your lasers shine.

 In 2010, the world mined 133,000 metric tons of rare earths. Of that, all but 3,000 tons came from China. In the United States there is one mine €”in Mountain Pass, Calif. €”responsible for the entire country’€™s output.

 ”€œWe could go without this [rare earth] stuff”,€ said Matt Joeckel, a University of Nebraska- Lincoln geologist who also works for the state’s Conservation and Survey Division, “if we cared to go back to maybe a 1940s level of technology.

Global demand for rare earths is projected to climb 8 percent a year, while the Chinese have clamped down the growth of supply at zero.

A U. S. Energy Department report last year warned that supplies are “€œat risk”€ of disruption. Limits on Chinese exports could increasingly mean that high-tech equipment made with rare earths will only be made in China.

General Electric led a small parade of American manufacturers testifying to Congress this month urging the country to spur its own production.

At stake isn’€™t just the ability to make a better cell phone (tiny magnets make for tiny speakers) or a sharper television picture (the phosphor red in screens comes from europium). The elements are critical to oil refineries and cutting-edge medical care. And rare earths play a growing role in making our modern military more modern.

Some in Congress have suggested the country’s national security is threatened if supplies run too short.

Some 50 years ago, state geologists surveying southeast Nebraska found two oddities around Elk Creek. The rocks were more magnetic than most, and were denser.

Those findings drew the attention of mining company Molycorp Minerals. It drilled holes across the landscape and pulled out 90,000 feet of core samples.

Molycorp would ultimately walk away from Nebraska. In short, the price of the stuff then just wasn’€™t high enough to gamble on a mine.

A few decades later, a high-tech boom vaulted prices for rare earths upward. Canadian company Quantum Rare Earth Developments came looking at the core samples and reams of data left behind by Molycorp. Joeckel, the Nebraska geologist, had stockpiled it all for safekeeping.

Meantime, half a continent away, the same company that passed on Nebraska in the 1980s is cranking up production in California. Molycorp is the only producer of rare earths in the U. S. It stopped mining a few years ago so it could retool its processing plant at Mountain Pass €”a$530 million overhaul.

The new method is a greener process that uses far fewer chemicals and less water while shaving the cost of extracting the minerals from mined rock. The company expects to crank up operations in 2012 and produce up to 40,000 tons a year.

Yet even that added U. S. capacity is largely spoken for, without accounting for growing demand in the country.

“€œIt’€™s been a nightmare”, said Donald Geissler, a purchasing manager for small wind turbine maker Bergey Windpower in Norman, Okla. His company needs rare-earth magnets, which have gone up 40 percent in the last year. “€œWe don’€™t know in the near future if anything’€™s even going to be available”.

June 27, 2011, 6:22 AM
by Scott Canon

Gold and Silver Imports in India Surge 222% Amid Worry Over Currency Devaluation

Precious Metal Gold in Bars

Precious Metal Gold

Gold was marginally higher in most currencies Tuesday and on the verge of making new nominal highs in dollars, euros and pounds.

It is holding near record highs as there is no quick end in sight to economic turmoil in Europe after Greece was told to approve brutal new austerity measures to avoid defaulting on its debt. This would threaten the solvency of many western banks and the European Central Bank’s Fernandez Ordonez (member of the ECB’s governing council) warned Tuesday morning that the Greek crisis could have “€˜transcendent consequences€™”.

Further evidence of continuing very significant and robust demand from Asia and from China and India in particular was seen in massive Indian gold and silver imports. The figures released overnight showed a huge surge of 222% in May 2011, compared with May 2010.

Cross Currency Rates

Imports of gold and silver were a staggering $8.96 billion in May, a growth of 500% over the previous month and 222% over last year.

Official inflation rates in India have surged to 8.65% and people on the Indian sub continent are concerned about the devaluation of the rupee and the erosion of the purchasing power of their savings.

While the rupee has maintained its value against the beleaguered U.S. dollar it has fallen sharply against gold and silver and against oil and the other food and energy commodities.

Gold has always been seen as a store of value against currency debasement, inflation and hyperinflation in Asia. This is especially the case in India and we appear to be witnessing an acceleration in the recent trend of Indians opting to buy gold and silver bullion in order to protect their savings.

India’s central bank, the Reserve Bank of India, bought 200 tonnes of gold from the IMF in the months preceding an announcement in November 2009. Given its huge dollar reserves it is likely that it is continuing to diversify foreign exchange holdings and further announcements of increased gold reserves are likely in the coming months.

Despite the increase in reserves its gold holdings remain paltry when compared with the U.S. and European gold reserves.

Most creditor nation central banks in the world are now diversifying out of the major currencies, the dollar and the euro, and into gold. These include the People’s Bank of China, the Russian central bank and central banks in Sri Lanka, Bangladesh, Mauritius, Mexico, Iran and Saudi Arabia.

News came Monday that Russia’€™s central bank again increased its gold holdings to 26.7 million troy ounces last month, from 26.5 million at the end April. The Bank of Rossii said its gold reserves were valued at $41 billion as of June 1, compared with $40.7 billion a month earlier.

It is interesting that the Reserve Bank of India has granted licenses to seven more banks to import gold and silver bullion and this is indicative of the favorable view of gold and silver in India – both amongst the public and at the official level.

Indian banks are thus likely contributing to the massive increase in demand for gold and silver. Chinese banks are also catering to the increased demand of Chinese people for gold bullion for investment and savings purposes.

This is in marked contrast to their western banking counterparts, the vast majority of which, do not offer gold or silver investments at all.

As of the start of 2011, some 30 banks in India have been granted permission to import gold and silver. New additions to the list were Karur Vysya Bank, State Bank of Bikaner and Jaipur, State Bank of Hyderabad, Punjab and Sind Bank, South Indian Bank, State Bank of Mysore and State Bank of Travancore.

Since the start of 2011, India’s benchmark stock index, the Bombay Stock Exchange Sensitive Index, is down by more than 14% while gold in rupee terms is up 9%. The Sensex is essentially flat in the last year and the last 3 years despite soaring inflation.

The increased demand from India and wider Asia is sustainable and one of the fundamental reasons that gold and silver’€™s bull market remain very much intact.

Importantly, China was expected to surpass India as the world’€™s largest gold importer this year. After the most recent Indian import figures this is now not certain.

Chinese investors more than doubled their purchases of gold during the first quarter in 2011, compared with the same period last year. China invested $4.1 billion into gold bars and coins during this first quarter of 2011.

China’s investment demand increased to 90.0 metric tonnes (40.7 tonnes in the year prior), compared with India’s 85.6 tonnes.

Gold in Australian Dollars Breaking Out?

In a report Tuesday, the Australian Bureau of Agricultural and Resource Economics and Sciences conservatively estimated that bullion may average $1,500 an ounce this year. The metal has averaged $1,445 so far in 2011.

“€œUncertainty about the ability of many developed economies to stimulate economic growth and control growing budget deficits is expected to encourage investment demand for gold as a lower risk, or safe haven, asset,”, the Canberra-based agency said.

Despite some calling the Australian dollar a “€œsafe haven”€ currency, the Australian dollar has been sold recently and gold appears to be in the early stages of breaking out in terms of Australian dollars.

This is another indication of the global nature of gold’€™s bull market and the fact that all fiat currencies are now vulnerable to currency debasement and devaluation. Focusing on gold solely in U.S. dollar terms remains simplistic and misleading.

Gold’s consolidation in recent months in all currencies and gradual gains since late January suggest that we may be on the verge of a break out in all currencies and a powerful move upward in the next leg of the precious metal bull markets.

Thirteen Exotic Elements We can’t Live Without

From indium touchscreens to hafnium-equipped moonships, the nether regions of the periodic table underpin modern technology,€“ but supplies are getting scarce

AS YOU flick the light switch in your study, an eerie europium glow illuminates your tablet computer, idling on the desk. You unlock it, casually sweeping your finger across its indium-laced touchscreen. Within seconds, pulses of information are pinging along the erbium-paved highways of the internet. Some music to accompany your surfing? No sooner thought than the Beach Boys are wafting through the neodymium magnets of your state-of-the-art headphones.

For many of us, such a scene is mundane reality. We rarely stop to think of the advances in materials that underlie our material advances. Yet almost all our personal gadgets and technological innovations have something in common: they rely on some extremely unfamiliar materials from the nether reaches of the periodic table. Even if you have never heard of the likes of hafnium, erbium or tantalum, chances are there is some not too far from where you are sitting.

You could soon be hearing much more about them, too. Demand for many of these unsung elements is soaring, so much so that it could soon outstrip supply. That’s partly down to our insatiable hunger for the latest gadgetry, but increasingly it is also being driven by the green-energy revolution. For every headphone or computer hard-drive that depends on the magnetic properties of neodymium or dysprosium, a wind turbine or motor for an electric car demands even more of the stuff. Similarly, the properties that make indium indispensable for every touchscreen make it a leading light in the next generation of solar cells.

All that means we are heading for a crunch. In its Critical Materials Strategy, published in December last year, the US Department of Energy (DoE) assessed 14 elements of specific importance to clean-energy technologies. It identified six at “critical” risk of supply disruption within the next five years: indium, and five “rare earth” elements, europium, neodymium, terbium, yttrium and dysprosium. It rates a further three – cerium, lanthanum and tellurium – as “near-critical”.

What’s the fuss?

It’s not that these elements aren’t there: by and large they make up a few parts per billion of Earth’s crust. “We just don’t know where they are,” says Murray Hitzman, an economic geologist at the Colorado School of Mines in Golden. Traditionally, these elements just haven’t been worth that much to us. Such supplies are often isolated as by-products during the mining of materials already used in vast quantities, such as aluminium, zinc and copper. Copper mining, for example, has given us more than enough tellurium, a key component of next-generation solar cells, to cover our present needs – and made it artificially cheap.

“People who are dealing with these new technologies look at the price of tellurium, say, and think, well, this isn’t so expensive so what’s the fuss?” says Robert Jaffe, a physicist at the Massachusetts Institute of Technology. He chaired a joint committee of the American Physical Society and the Materials Research Society on “Energy Critical Elements” that reported in February this year. The problem, as the report makes clear, is that the economics changes radically when demand for these materials outstrips what we can supply just by the by. “Then suddenly you have to think about mining these elements directly, as primary ores,” says Jaffe. That raises the cost dramatically – presuming we even know where to dig.

An element’s price isn’t the only problem. The rare earth group of elements, to which many of the most technologically critical belong, are generally found together in ores that also contain small amounts of radioactive elements such as thorium and uranium. In 1998, chemical processing of these ores was suspended at the only US mine for rare earth elements in Mountain Pass, California, due to environmental concerns associated with these radioactive contaminants. The mine is expected to reopen with improved safeguards later this year, but until then the world is dependent on China for nearly all its rare-earth supplies. Since 2005, China has been placing increasingly stringent limits on exports, citing demand from its own burgeoning manufacturing industries.

That means politicians hoping to wean the west off its ruinous oil dependence are in for a nasty surprise: new and greener technologies are hardly a recipe for self-sufficiency. “There is no country that has sufficient resources of all these minerals to close off trade with the rest of the world,” says Jaffe.

So what can we do? Finding more readily available materials that perform the same technological tricks is unlikely, says Karl Gschneidner, a metallurgist at the DoE’s Ames Laboratory in Iowa. Europium has been used to generate red light in televisions for almost 50 years, he says, while neodymium magnets have been around for 25. “People have been looking ever since day one to replace these things, and nobody’s done it yet.”

Others take heart from the success story of rhenium. This is probably the rarest naturally occurring element, with a concentration of just 0.7 parts per billion in Earth’s crust. Ten years ago, it was the critical ingredient in heat-resistant superalloys for gas-turbine engines in aircraft and industrial power generation. In 2006, the principal manufacturer General Electric spotted a crunch was looming and instigated both a recycling scheme to reclaim the element from old turbines, and a research programme that developed rhenium-reduced and rhenium-free superalloys.

No longer throwing these materials away is one obvious way of propping up supplies. “Tellurium ought to be regarded as more precious than gold – it is; it is rarer,” says Jaffe. Yet in many cases less than 1 per cent of these technologically critical materials ends up being recycled, according to the United Nations Environment Programme’s latest report on metal recycling, published in May.

Even if we were to dramatically improve this record, some basic geological research to find new sources of these elements is crucial – and needed fast. Technological concerns and necessary environmental and social safeguards mean it can take 15 years from the initial discovery of an ore deposit in the developed world to its commercial exploitation, says Hitzman.

Rhenium again shows how quickly the outlook can change. In 2009, miners at a copper mine in Cloncurry, Queensland, Australia, discovered a huge, high-grade rhenium seam geologically unlike anything seen before. “It could saturate the world rhenium market for a number of years – and it was found by accident,” says Hitzman.

In the end, we should thank China for its decision to restrict exports of rare earths, says Jaffe, as it has brought the issue of technologically critical elements to our attention a decade earlier than would otherwise have happened. Even so, weaning ourselves off these exotic substances will be an immense challenge – as our brief survey of some of these unsung yet indispensable elements shows.
Bibliography

US Department of Energy, Critical Materials Strategy
American Physical Society and Materials Research Society, Energy Critical Elements
US Geological Survey, Mineral Commodity Summaries

by James Mitchell Crow

Precious Metals: Is Tellurium the new Gold?

Tellurium is a chemical element that has the symbol Te and atomic number 52.
Rare Industrial – Metal – Tellurium

Gold has been spectacularly popular among investors for the past couple of years.

Silver seems to be this year’s gold.

So, what’s next year’s silver gonna be?

According to Robert Jaffe, a physicist at MIT, tellurium could be a metal investor’s best new play.

“Tellurium ought to be regarded as more precious than gold — it is; it is rarer,” he tells New Scientist magazine.

An article by James Mitchell Crow in the June, 2011 issue of New Scientist, titled “13 Exotic Elements We Can’t Live Without,” points out:

We rarely stop to think of the advances in materials that underlie our material advances. Yet almost all our personal gadgets and technological innovations have something in common: they rely on some extremely unfamiliar materials from the nether reaches of the periodic table. Even if you have never heard of the likes of hafnium, erbium or tantalum, chances are there is some not too far from where you are sitting.

You could soon be hearing much more about them, too. Demand for many of these unsung elements is soaring, so much so that it could soon outstrip supply. That’s partly down to our insatiable hunger for the latest gadgetry, but increasingly it is also being driven by the green-energy revolution. For every headphone or computer hard-drive that depends on the magnetic properties of neodymium or dysprosium, a wind turbine or motor for an electric car demands even more of the stuff. Similarly, the properties that make indium indispensable for every touchscreen make it a leading light in the next generation of solar cells.

All that means we are heading for a crunch. In its Critical Materials Strategy, published in December last year, the US Department of Energy (DoE) assessed 14 elements of specific importance to clean-energy technologies. It identified six at “critical” risk of supply disruption within the next five years: indium, and five “rare earth” elements, europium, neodymium, terbium, yttrium and dysprosium. It rates a further three – cerium, lanthanum and tellurium – as “near-critical”.

Here are the 13 elements necessary for cleantech applications that may be winners in this year’s commodities portfolio:

Neodymium

New Scientist says:

These numerous uses make for a perfect storm threatening future supplies. In its Critical Materials Strategy, which assesses elements crucial for future green-energy technologies, the US Department of Energy estimates that wind turbines and electric cars could make up 40 per cent of neodymium demand in an already overstretched market. Together with increasing demand for the element in personal electronic devices, that makes for a clear “critical” rating.

Erbium

New Scientist says:

Erbium is a crucial ingredient in the optical fibres used to transport light-encoded information around the world. These cables are remarkably good at keeping light bouncing along, easily outperforming a copper cable transporting an electrical signal. Even so, the light signal slowly fades as it racks up the kilometres, making amplification necessary.

Tellurium

New Scientist says:

In 2009, solar cells made from thin films of cadmium telluride became the first to undercut bulky silicon panels in cost per watt of electricity generating capacity.

Because the global market for the element has been minute compared with that for copper – some $100 million against over $100 billion – there has been little incentive to extract it. That will change as demand grows, but better extraction methods are expected to only double the supply, which will be nowhere near enough to cover the predicted demand if the new-style solar cells take off. The US DoE anticipates a supply shortfall by 2025.

Hafnium

Hafnium’s peerless heat resistance has taken it to the moon and back as part of the alloy used in the nozzle of rocket thrusters fitted to the Apollo lunar module. Since 2007, though, it has also been found much closer to home, in the minuscule transistors of powerful computer chips.

That’s because hafnium oxide is a highly effective electrical insulator. Compared with silicon dioxide, which is conventionally used to switch transistors on and off, it is much less likely to let unwanted currents seep through. It also switches 20 per cent faster, allowing more information to pass. This has enabled transistor size to shrink from 65 nanometres with silicon dioxide first to 45 nm and now to 32 nm.

By Justin Rohrlich June 20, 2011

Are We Running Out of Silver?

Silver is a metallic chemical element with the chemical symbol Ag (Latin: argentum, from the Indo-European root *arg- for "grey" or "shining") and atomic number 47.

Precious Metal - Silver

Silver has been on fire over the last three years – substantially outperforming its spotlight-grabbing cousin, gold.

Because we believe this bull run is far from over, we advise investors to always maintain exposure to the precious metals markets. Even if you haven’€™t yet participated in the run-up of both gold and silver, I’€™m glad you’€™re ready to take a look at the investment potential of silver.

The question every investor faces in a bull market is: Do I buy now, anticipating prices will continue higher — and chance getting clobbered if a correction arrives? Or do I wait for a pullback and possibly miss out on big gains? There’€™s risk either way.

Our goal in this report is to suggest various ways you can invest in silver, while underscoring the importance of patience and discipline. Investors must remain patient to avoid chasing silver, overpaying, and draining their cash. Instead, we recommend that you use temporary price declines to steadily accumulate the best silver stocks and your preferred form of bullion.

Looking back after this bull market has finally run its course, we think gold and silver will have amply rewarded those who bought smart, had meaningful exposure, and stayed the course.

Silver: The Lay of the Land

There is ample data on the silver market to consider, but there are two specific issues regarding supply and demand that are critical to understand.

The first is industrial use. Demand from a number of industries that use silver has been flat or falling. Household demand for silver like cutlery, flatware, and candlesticks hasn’€™t risen in ten years. Jewelry fabrication is up but a blip. With the shift to digital photography and image storing, use in photographic film processing continues to fall. And yet, total demand from industrial users keeps climbing.

So what’s driving industrial demand?

Uses for Silver Are Growing

Since 1999, consumption in electronics has increased 120%. Silver use in solar panels began in 2000, and usage is up 640% since. Silver was first used in biocides (antibacterial agents) in 2002 and, while a small percentage of total silver use, it has grown six-fold.

The point is that not only are the number of uses for silver growing, the demand within each of those applications is rising as well. This is important to keep in mind because, traditionally, the industrial component of silver tends to keep the price soft in a poor economy – and Doug Casey is convinced we’€™re on the cusp of the Greater Depression.

However, these increasing sources of demand are now more likely to keep a floor under the price in the future. In fact, the Silver Institute forecasts that total industrial use of silver will rise by 36% over the next five years, to 666 million troy ounces/year. That’€™s a lot of silver, meaning this portion of demand, which is roughly 60% of all fabrication, isn’€™t letting up anytime soon.

The second issue is mine supply. Silver mine production has been increasing over the past decade, largely due to rising prices, allowing companies to ramp up production and bring more metal to the market. In fact, global mine production is up 33% since 1999. Meanwhile, total demand, as you’€™ll see in the chart below, is also rising.

Mine Production Can’€™t Keep Up with Demand

So what’€™s the concern?

In spite of miners digging up more and more silver, production alone can’€™t meet global demand, and the gap has to be filled by scrap silver coming to market.

And there’€™s a catch with scrap. While scrap metal comprises about 20% of silver’€™s total supply, many of these new applications are difficult to reclaim. Some applications contain such small amounts that they’€™re uneconomic to recapture, such as many biocidal and nanotechnology applications. With others it’€™ll be a long wait. Solar panels, for example, have a 20- to 30-year life. Still others are waiting on more effective recovery programs; more than half of all silver in cell phones, TVs, computers and other electronics, for instance, still ends up in landfills.

In other words, a growing portion of the silver that’€™s consumed won’€™t be returning to the market anytime soon.

Jeff Clark, Senior Precious Metals Analyst
June 16, 2011 6:05pm

The 2011 Silver Quiz

CPM Group recently released their 2011 Silver Yearbook, one of the industry’s most comprehensive sources of information on the silver market. Though mostly a reference book, I uncovered some interesting facts that paint a decidedly bullish picture for the metal going forward.

If you’re a silver investor, or are concerned about the recent sell off, you may find the following data very compelling. It provides an inside track on the market and will certainly make us all more knowledgeable investors.

For fun, I put what I read into the form of a quiz. See how many you can get correct…

1) The #1 driver for silver’s price increase in 2010 was:
a) Investment demand
b) Fabrication demand
c) Lower supply

While both fabrication demand and supply rose last year, investors bought 142 million ounces of silver – the third highest level on record, and the highest since 1980. This pushed the price into record territory.

It’s noteworthy that investment demand was higher last year than during the recession year of 2009. This suggests that investors buy silver more out of dollar devaluation and inflation fears than simply due to an economic contraction.

2) Silver mine production:
a) Exceeds demand
b) Matches demand
c) Falls short of demand

Silver produced from worldwide mining totaled 667 million ounces last year – but total demand hit 986 million ounces. Despite the fact that mine production has increased 33% since 1999, it falls far short of supplying the market’s needs. While scrap coming to market makes up the difference, this gap is one of the more critical issues going forward. The delicate balance between supply and demand will become increasingly precarious as overall demand continues to grow.

3) Household demand for silver (cutlery, flatware, and candlesticks) hasn’t risen in ten years. Jewelry fabrication is up but a blip. Silver use in photography continues to fall. So, true or false?: Total demand is falling.

False. Industrial use has more than made up the difference from declines in other uses, and is pushing demand to new levels. Since 1999, consumption in electronics has increased 120%. Silver usage in solar panels began in 2000 and is up 640% since then. Silver was first used in biocides (antibacterial agents) in 2002 and, while a small niche, it has already grown sixfold. In fact, new uses for silver are being found almost every day, particularly in the biocide arena, making it increasingly difficult to catalog all its growing applications.

The Silver Institute forecasts that total industrial use of the metal will rise 36% over the next five years, to 666 million troy ounces annually. That’s a lot of silver, meaning this portion of demand – which is roughly 60% of all fabrication – isn’t letting up any time soon.

4) Silver represented what percent of global financial assets at the end of 2010?
a) 1.7%
b) 0.7%
c) 0.07%
d) 0.007%

D. In spite of last year’s record-high prices, silver is, by any account, a miniscule portion of the world’s wealth. The ratio’s high occurred in 1980, reaching 0.34% of financial assets. Silver as a percentage of global assets would have to grow over 48 times to match the record. It is true that many more paper assets exist today than 30 years ago, but the renaissance in silver will continue to increase its portion of worldwide assets.

5) The largest manufacturer of silver coins is the U.S. Mint, which sold 34.7 million ounces last year, about 46% of the world total. What country is the second largest?
a) Austria
b) Canada
c) U.K.
d) South Africa

The Austrian Mint contributed 15% of total silver coin sales last year (11.4 million ounces), an increase of 26% over 2009. Still, the American Silver Eagle rules the global roost. Given how recognizable it is around the world, it’s what to buy if you don’t own enough metal.

6) Of the following groups of countries, which is increasing silver production and which is in decline?
a) Mexico, Australia, China, Argentina
b) Peru, U.S., Canada

Countries in group A are increasing production, while to the surprise of many, each one in group B is in decline. This has direct ramifications for your silver stock investments. Total newly refined supply is expected to surpass one billion ounces for the first time in history this year, so make sure you have some exposure to countries where production is growing.

7) The average cash cost to produce an ounce of silver from primary silver mines is:
a) $7.16
b) $6.16
c) $5.16
d) $4.16

Of the 30 primary silver mines in the world, average cash cost range in at $5.16 per ounce (net of byproduct credits). This is almost double 2002 levels. The silver price has risen 650% in the same time frame, however, so margins have risen in spite of higher costs.

8) The only governments that hold silver in inventory are the U.S., Mexico, and India. How many combined ounces do they hold?

a) 55 million
b) 155 million
c) 255 million
d) 355 million

Only 55 million ounces are estimated to be stored in these three countries. This equals only 5.6% of annual global demand. Governments held approximately 355 million ounces in 1970, but this has diminished largely due to the U.S. decision to stop using silver in its currency in the 1960s and other governments following suit. No other countries are believed to hold any silver in inventory. Mine production and scrap supply had better keep up, because there is no backup source.

9) China accounts for how much of worldwide mine production?
a) 9%
b) 11%
c) 14%
d) 16%

Chinese mine supply totaled 102.7 million ounces last year, 16% of global production. China is the third largest silver producer, behind Mexico and Peru.
Mine production in China has more than doubled just since 2000, largely due to Beijing’s decision to deregulate the state-controlled market the year before. This trend is certain to continue, due to rising silver prices and the fact that many parts of the country are under explored. If you don’t own a Chinese silver producer, you’re missing out on some of the most explosive growth around the globe.

10) What is the weakest month of the year for the silver price?
a) January
b) June
c) July
d) October

Summer is usually the most sluggish time of the year for silver, and July is historically the weakest. Got your dealer’s number handy?

It’s clear that the forces underpinning the silver bull market aren’t going away any time soon. Demand is high, but it’s not an anomaly when viewed through an historical lens. Silver has been used as money for over 3,000 years, and the word for “money” in many languages is “silver.”

Meanwhile, our current monetary issues are far from over, won’t be easily resolved, and will take years to play out. Precious metals are proven forms of protection for this environment. Silver, along with gold, is your best defense against unsustainable fiscal imbalances and massive currency debasement, and will be a profit center for years to come.

Jeff Clark, BIG GOLD

The Rarest Rare Earth on Earth

Short seller Jim Chanos is well known for his negative assessments of China, especially Chinese real estate. One of his more colorful expressions about China’s economy is “the Chinese are on a treadmill to Hell.” We’re sure the Chinese don’t mind criticism from Chanos, or anyone else,€“ as long as it convinces as many non-Chinese as possible that China has massive problems and represents no threat. From that point of view, kudos to Chanos.

Unfortunately, that expression really applies to the West, and to the U.S. in particular. Step back and look at the amount of money we continue to pump into our economy. Look at the national debt as it surpasses $14 trillion,€“ with a t. Look at the multibillion-dollar deficits that we now battle to bring under control.

Billions of dollars continue to flood into our economy, courtesy of the Fed’s program of quantitative easing, but look at the results. Last month an additional 50,000 were newly employed, a number not significantly different than zero. If anyone actually got a job,  great. Yet with current expectations of economic growth now around 2%, the unemployed continue to hold a very short straw. With productivity gains averaging about 2%, that means the economy can achieve the current growth rate without adding any jobs, never mind the increases in the population which in time will add to the unemployment rate.

The employment data weren’t the only worrisome figures. There’s an array of troubling statistics, ranging from manufacturing to consumer sentiment to housing. In fact, consumer sentiment is the most “fuzzy” of all the data sets, but it really does set the tone. Consumer spending represents 70% of our economy, and until that segment improves, it’s difficult to make a case for a stronger economy.

We don’t want to get too carried away with our bearish rant,€“ but when you look at the employment figures and other data, they don’t make for cheerful historical parallels. After all, it was in the early 1930s that Hoover decided that the way to prosperity was balancing the budget. Need we say more?

Look at the chart again. First, note that this chart, dismal as it seems, does have a positive connotation,€“ or at least at first blush a positive connotation. It certainly suggests a deeply depressed dollar, which explains a paradox of the current U.S. stock market. Those U.S. companies doing business abroad have done fairly well. That’s because all those profits are converted back into dollars from other, rising currencies. That means a tremendous boosts to profits, which translates into a stronger market. But how long can that continue?

That question actually doesn’t revolve around monetary policy, because how much choice does the U.S. government have if all the money in the world just keeps us marching in place? Or, to be more precise, if it just keeps us from sliding further downward. Since the beginning of the century, the average real household income of Americans has declined about 10%. Yet the printing presses continue to work overtime.

But all the paper money in the world cannot make more oil or more copper or more titanium – though it will make all commodities more expensive. And that is why our average real income continues to fall despite all this money.

So the real reason why the S&P (and virtually everything else American) is depressed compared to the Australian dollar and other resource currencies and countries is because we simply don’t have the resources. And without those resources, our standard of living has to go down.

When you’re in an economy in which a $35,000 household income is considered well above the poverty line, but it takes $100 a week at the pump to transport the family, you have problems. (In addition to the “oil tax,” copper, silver and other necessity metals have gone up dramatically, despite weakened demand in this country.)

Of all commodities, Americans focus on oil,€“ and for good reason: It’s the commodity we consume the most of, and we’re heavily dependent on foreign oil sources. But in the resource field, the chain is only as strong as its weakest link. Ultimately, we have to focus on what is scarcest.

And we have to change the way we think about scarcity. There’s too much emphasis on analyzing individual resources rather than considering related packages of resources. “Scarce” means whatever resource takes the most other resources to obtain. In any closed system (and the Earth as a whole is the ultimate closed system) any critical resource becoming ever more scarce is enough to sink the system, or at least to dramatically change the system into one in which material wellbeing sinks or population shrinks.

In short, the scarcity of oil is connected to the scarcity of silver, copper, rare earths – even the transition metal zirconium. And the more research we do into metal scarcity, the more concerned we become. Lately we have been ever more concerned about rare earths,€“ not because they are so scarce, but because they are so difficult to produce and because there are so few concentrated deposits in the world. And those that do exist seem to be getting very short shrift.

The two most significant non-Chinese deposits of heavy rare earths,€“ which are the ones that really count because they are needed for magnets that are used in everything from wind turbines to defense equipment,€“ are in Canada. One is Avalon Rare Metals (AVL); the other is Quest Rare Minerals (QRM). These are small companies, with a combined market value of about $800 million, which means most mutual funds can’t even look at them. They’re also unabashedly speculative investments.

But as sources of rare earths, they may be critical. Avalon controls the Nechalacho Rare Earth Element Deposit in Canada’s Northwest Territories. This strike is believed to contain not just REEs, but the heavy rare earths (HREEs) like dysprosium that are vital in the creation of ultra-strong industrial magnets. Quest has five REE sites in Eastern Canada, including Strange Lake, Misery Lake and Plaster Rock.

The bad news: in our opinion, it would take an industrial effort on the level of the Manhattan Project to make these exciting finds truly productive before the REE crunch hits us for good. Finding rare earths are only a small part of the process of turning the ore into usable materials. Separation, refining, fabricating all take huge capital investments. And we haven’€™t even mentioned the human capital,€“ the engineers and miners – of whom there is a deadly dearth in the American labor force.

As a result, absent massive government intervention, these heavy rare earths are unlikely to find their way into products for another decade or so. In the meantime, we must rely on the Chinese, who do have the necessary skills and equipment. You just can’€™t make this stuff up.

The Australian Iluka Resources (ILKAF.PK) is another industrial miner, but focused on zirconium and titanium instead of rare earths. The calculus around zirconium is very similar to that of rare earths. And with zirconium prices rising from $340 a metric ton in 2003 to $2000 in 2011, Iluka is poised to meet an enormous, growing, and unmet demand.

 In the end, we feel investors should choose resources over currency (except for gold and silver which remain the first-choice currencies). Monetary policy can’t solve every problem, and U.S. monetary policy is far more constrained than it was a decade ago. The dollar cannot decrease forever. At some point, the declining dollar will raise bond yields, and then the treadmill will really begin to accelerate and tilt even further south.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours

Author: Dr. Stephen Leeb
SeekingAlpha.com Article June 10, 2011

About the Author:
Dr. Stephen Leeb is a recognized authority on the stock market, macroeconomic trends and commodities, especially oil and precious metals.

Rare Earth Metals to Rise

Yesterday was by far the most hectic day I’€™ve had since coming onboard RareMetalBlog. In the AM, for a time, everything was quiet and relaxed. Not in a serene ‘sink into a warm bath with a glass of Glen Rothes€™ way, but in an eerily relaxed, something’€™s about to go wrong manner. Perhaps nervous energy is clairvoyant.

Then the phone started to ring. And ring. People justifiably excited, curious, concerned. The Shin-Etsu release outlining their drastically rising rare earth prices, which my colleague Robin Bromby already discussed here, seemed to be just the beginning. Movement in the majority of rare earth stocks, the big Molycorp sell, China’€™s consolidating 35 REE companies in Inner Mongolia under Baotou. These would have all been justifiably large points of interest in and of themselves.

But they weren’€™t what everyone was focussing on. Or, rather, they weren’€™t people’€™s primary focus. Reports of rare earth prices in China raising by 50%, 90%, 125%, all in the course of Tuesday evening, were what everyone was talking about. 500$+ raises in Dysprosium kg prices, within a couple of hours, were bandied about.

Unsurprisingly, I spent almost all of yesterday on the telephone, and well into the evening (bloody time zones). I spoke with analysts in Tokyo, someone from the US Department of Energy, CEOs, a fellow at the Royal Institute of International Affairs (Chatham House) in London, renowned REE specialists. I even stayed up until the wee hours and rang a few connections from Beijing.

Using a typical supply and demand Smithian economic model, the most natural assumption for drastically raising prices is an influx in demand. However, Chinese REE market experts I spoke with told me that trading volumes have been low (with the caveat that separation plants seem almost loath to sell anything).

Opinions differed greatly, but, in the end, it seems to boil down to this.

The Molycorp share sale announcement, with insiders reportedly selling up to 24% of outstanding shares (referred to in the aforelinked article as “€œan abandonment” by Byron Capital Markets analyst Jon Hykawy) was responsible for the slight dip in share prices in many rare earth companies, which has already stabilised and corrected itself. No great surprises there. A major player in any field has a serious selloff thrust upon itself, and, for a couple of hours at least, the bulls start screaming bear. This frequently wanes quickly, after an Advil (or a Red Bull) and a quick look at why they were bull on the market in the first place. This was no exception.

The much more interesting aspect of all of yesterdays news was the spectacular price increases, and the Baotou consolidation. The Chinese Ministry for Information and Technology’€™s statement yesterday that they had consolidated, restructured, or closed down 35 REE companies, giving Baotou Steel Rare Earth Group a monopoly on Inner Mongolian rare earths.

This has been anticipated for some time, and a similar move with the companies in the south would also not come out of left field.

The consolidation, and the price increases, are in no way autonomous events. To be honest, the word communique© springs to mind. China is lightyears ahead in the REE space, and they’€™re well aware of it. Sun Tzu wrote: “€œOne hundred victories in one hundred battles is not the most skillful. Seizing the enemy without fighting is the most skillful”,€ and here one can see the associative application.

It’€™s a demonstration of strength, to be sure, but also a suggestion. China wants foreign REE companies to work with them. Open offices and plants in the Middle Kingdom, give credence to Baotou’€™s newly approved Rare Earths Product Exchange, and generally feed into the world’€™s quickest growing economy.

This is going to be quite the summer. Best check to make sure my subscriptions to the People’s Daily and the SCMP are up to date. Seems I’€™ll be needing them.

Thursday, June 09, 2011
by Byron Hawes

Why China’s Rare Earth Metals Matter

For several months, I have alerted readers to the potential supply crisis of critical rare earths (REMX), which are used in our most vital defense technologies (ITA) and high tech industries (QQQQ). The recent volatility in the equity markets have caused many investors to flee rare earth mining stocks in search of safe havens in gold (GLD) and long term treasuries (TLT). This trend should be transitory in nature. We may see a strong rebound in many of these rare earth stocks once the uncertainty regarding the ending of QE2 winds down.

The latest Chinese data indicate that rare earth exports are continuing to drop by more than half compared with last year’€™s output. In April, China exported only 1,819 tons of rare earths, a shortfall of 53% from the previous year.

High tech manufacturers outside of China must look elsewhere to satisfy their rare earth needs. Rare earth prices are soaring, but the rare earth mining stocks are not reflecting the elevated prices yet. This phenomenon will not last long as institutions will begin catching on to the divergence between rare oxide prices and undervalued rare earth miners. Prices are soaring, rising almost ten times in the past year, forcing manufacturers in Japan, South Korea, the United States and Europe to search for future supply for their survival. This should be a bonanza for rare earth developers down the road, once manufacturers dip their toe into the water and acquire some of these vital assets. Once one does, we may see a domino effect of consolidation. It’s within the realm of possibility that cash-rich manufacturers will be compelled to enter agreements and alliances with global sources of supply and potential miners.

It’s time for the affected industrialized nations to do their own heavy lifting in providing these vital elements so necessary for the very survival of their manufacturing base. We are talking here of an emergency process, which will take time to develop from mining to manufacturing. Advanced nations must think of urgent measures such as developmental fast tracking, financing and legislative expediting to bring these projects to fruition.

Noises are being made about taking China to court, namely through the World Trade Organization. It is questioned whether such a resort to complicated and lengthy legal procedures can be successful. Time is truly of the essence. Whether the proposed case has merit or not, modern industrialized nations must seize the high ground and move rare earth mining forward.

Development of the rare earth initiative is long past due. The Department of Defense requires it and the high tech industry demands it. The West has the expertise and the capability of recapturing the base that was once ours and was co-opted by the Chinese.

June 7, 2011 By Jeb Handwerger

US Rare Earth Public Policy Needs to Move From Studies to Actions

One of my favorite consulting slogans of all time “Analysis Paralysis”€” aptly captures the state of US public policy on rare earth metals and critical minerals (not to confuse the two). After our story last week on testimony presented to the House Committee on Natural Resources, urging the Committee to take action on a number of bills involving rare earth metals, we heard from Jeff Green, a well-known rare earth and specialty metals lobbyist. Green wanted to share some of his perceptions of current legislation and where he thinks US public policy needs to go to begin addressing some of the strategic supply constraints.

Rare Earth Stockpiling

“€œA lot of people are misperceiving what is being debated related to a stockpile”,€ Green said. “€œThe only proposal on the table involves a new version of the RESTART Act (Rare Earths Supply Chain Technology and Resources Transformation (RESTART) Act of 2011) that calls for a 250-ton inventory of rare earth alloy and rare earth magnets.”€ The concept involves creating a small vendor-managed inventory that could be drawn down in a time of war. The “stockpile” would involve the government essentially buying up capacity from one of the US mining firms, as opposed to actually taking title and inventory. This approach, according to Green, provides critical domestic demand, a key component of re-starting US industry.

An Incremental Approach€“ the RESTART Act

Another approach, one that Green favors, was offered by Rep. Mike Coffman (R-Co.) as an amendment to the Fiscal Year 2012 National Defense Authorization Act. It requires the DOD to create a Rare Earth Inventory Plan that would explore risk mitigation for those individual elements expected to be in short supply like neodymium and dysprosium.

This plan would be a follow-up to another congressionally mandated report, due to come out this summer, that essentially includes a supply and demand analysis by element for DOD. The Coffman amendment to the FY12 NDAA would require the Defense National Stockpile Center (now renamed Defense Logistics Agency Strategic Materials) to look at the elements in shorter supply and identify how the government plans on securing those elements and downstream value-added products such as metal, alloy and magnets. The amendment would only cover defense applications (not commercial), though the executive branch could take it further, should it so choose, according to Green.

Rather than try broad-brush solutions, Green suggests approving smaller incremental approaches that actually offer solutions. For example, he suggests passage of an initial bill that covers specific rare earth metals as opposed to all or other critical materials such as copper and cobalt that could quickly spin legislative action out of control.

Neodymium, Samarium, Dysprosium, Yttrium, Terbium: Good Places to Start

The “€œheavies”,€ as they are commonly referred to, present a different challenge as the US currently does not produce any of these elements.

Moreover, according to the U.S. Magnetic Materials Association (USMMA), the following defense applications remain dependent upon rare earth materials. In particular, precision-guided munitions (requiring samarium-cobalt or neodymium iron boron permanent magnets), neodymium iron boron magnets used in helicopter stealth technology, tanks and other vehicles use rare earth lasers for range finding, military communication satellites and yttria-stabilized zirconia used in “€œhot”€ sections of jet engines, according to the USMMA.

The USMMA supports legislation that “€œemphasizes production”€ to restart reliable domestic manufacturing for these key materials as well as defense-specific stockpiling for the most critical of the 17 rare earth elements via the Defense Logistics Agency.

At the end of the day, according to Green, US public policy should focus on only two initiatives:

  • Define what we are short of
  • Determine how we get it

It’€™s hard to argue with that. But with some estimates of the time needed to rebuild a rare-earth supply chain of 15 years, and a minimum of two years to create magnet facilities for sintered neodymium iron boron permanent magnets, Congress had better start acting soon.

June 7, 2011 By Lisa Reiman