As Valuable as Rare Earths

Dave Gonigam – June 3, 2011

  • The “wonder substance” in high demand, and under China’s thumb… and it’s not rare earths
  • Market tumbles as Labor Dept. statisticians pull only 54,000 new jobs out of their collective backsides
  • Deconstructing the debt ceiling: Reader poses heretical question, The 5 suggests heretical answer
  • Ron Paul with some summertime reading to make you both “enlightened and angry”

   Imagine being able to download an entire movie from the Internet — in 3-D high-definition — in only seconds.

The best you can do nowadays is about 45 minutes. And that’s with a really fast connection. And a standard-definition movie.

The good news is that the technology to make it happen is in the lab right now, thanks to what a recent PC Magazine article calls “the next wonder substance in computing.”

   The bad news is that this “wonder substance” bears a lot of similarities to rare earths…

  • Intense demand for a host of high-tech applications
  • Rising prices — doubling in recent years
  • High percentage of world production controlled by China.

Like rare earths, early investors in this wonder substance — Byron King calls it the new silicon — stand to do very well.

   There’s one crucial difference between this new silicon and rare earths. While rare earths lie in an obscure section of the periodic chart and inevitably come with tongue twister names, the origins of the new silicon couldn’t be more mundane…

Recall from your youth that the “lead” in a pencil is actually graphite — a variation on the carbon atom.

In 2004, researchers developed a variation on the variation — a form of graphite that can stretch like elastic and conduct heat and electricity. “It is not only the thinnest material in the world,” reports The New York Times, “but also one of the strongest… a sheet of [it] stretched over a coffee cup could support the weight of a truck bearing down on a pencil point.”

As you can imagine, the potential uses are almost limitless. And “we’re still in the very early innings of understanding the technology,” says Energy & Scarcity Investor editor Byron King.

Here’s just a handful of uses identified by physicist Michio Kaku from City University of New York…

  • Aircraft that weigh less
  • More-efficient batteries
  • Stronger, lighter plastics
  • More advanced touch-screen and LCD displays
  • Replacement for silicon transistors.

Hence, the new silicon. It “enables us to make modulators that are incredibly compact and that potentially perform at speeds up to 10 times faster than current technology allows,” according to Dr. Xiang Zhang of the University of California, Berkeley.

That’s how near-instant downloads of 3-D high-def movies will be possible.

   “Good graphite is not that easy to find,” says Byron King, turning to the supply and demand issues critical to our wonder substance. “Graphite prices have more than doubled in recent years.

“Based on recent quotes, a ton of 97% pure graphite goes for over $2,000. A ton of ultra-pure 99.99% graphite will set you back over $20,000.”

   And then there’s the China factor. “China controls 80% of the global graphite market — just like China runs 97% of the world supply of rare earths,” Byron continues.

“But the Chinese are running low on graphite reserves. Same story as with rare earths. So graphite prices are going up and Chinese quality is going down.

“In fact, Chinese businesses are working in North Korea, making deals to open and operate graphite mines in the Hermit Kingdom. Really, how scarce does something have to be that you’ll set up shop in North Korea to get it?”

   Thus, just as with rare earths, there’s a scramble to secure new supplies of graphite outside China. The search is taking on added urgency because Chinese supplies have been disrupted. Last month, floods shut down a key graphite mine in Hunan province.

One of the most promising sources lies within North America — 8 million tons. And it’s controlled by a tiny exploration outfit Byron recently uncovered. It can produce graphite for $400 a ton and sell it for $2,000. That’s $12.8 billion in potential… for a company with a market cap of $58 million.

Byron built a stellar track record in rare earths — first bringing them to our attention more than three years ago. For readers of his premium advisory Energy & Scarcity Investor, that’s translated to gains of 109% in a little over two months on Rare Element Resources.

He also got readers into Molycorp for 178% gains in just over four months… and got them out right before a big pullback. Other rare earth picks of Byron’s have delivered gains of 94% and 147%… in a time frame of nine months or less.

Byron sees the same potential now with graphite. “I expect the market to catch on within a matter of weeks or months,” he says. “Also, we’re probably going to hear a lot of positive press in the near future.” You’ll want to be in already when that happens.

As always, Byron makes a compelling case for an idea whose time has come. He lays it all on the table for you in his latest presentation.

   One word to describe the May nonfarm payrolls report from the Bureau of Labor Statistics: Fugly.

For all their statistical jiggering, seasonal adjusting and birth-death modeling… the economists in the BLS’ employ could conjure up only 54,000 new jobs for last month. That’s [pause for some quick in-the-head math] less than a third of the 170,000 that made up the “expert” consensus of economists polled by Bloomberg.

Oh, the March and April figures were revised downward. Onto the particulars for May…

  • Private employers added 83,000 jobs; governments cut 29,000
  • The U-3 unemployment rate commonly reported in the media rose from 9.0% to 9.1%
  • The U-6 rate, including part-timers who want to work full-time and people who’ve given up looking for work, fell from 15.9% to 15.8%.

Throw in the people who gave up looking for work more than a year ago and you have a real unemployment rate of 22.3%, per John Williams at ShadowStats.com.

The red line on the Calculated Risk chart that plots job losses and recoveries for every post-World War II recession is flattening:

Click on chart to enlarge

Meanwhile, the percentage of the working-age population in the labor force was unchanged from the month before. So was the employment rate of the overall population. Both numbers remain mired at 1984 levels.

   The unemployment numbers are putting a hurt on stocks again today. The Dow and the S&P are both down nearly 1% as of this writing. The S&P might well end the week below 1,300.

   Once again, the hot money fleeing stocks is flooding into Treasuries. The yield on a 10-year note has dropped to 2.97%.

   Currency traders are dumping the dollar, perhaps assuming the weak jobless numbers will hasten the arrival of QE3. Of course, QE1 and 2 didn’t do squat to create new jobs, but they sure did debase the dollar.

Thus, the dollar index, which sat above 76 for a while last Friday, may well dip below 74 before day’s end.

   Not surprisingly, precious metals are perking up. Gold is up to $1,544. Silver’s at $36.18.

   To our bulging file of bureaucratic busybodyness, we add the saga of Martin Reid, a farmer in Sabrevois, Quebec.

Floodwaters have ravaged his neck of the woods south of Montreal. His cornfields sit under three feet of water. It’s so deep, carp are swimming in it.

To get rid of the fish, Reid has — get this — bought a fishing license.

Martin Reid, properly permitted as he stands knee-deep in his fishing hole

Reid learned his lesson the hard way after his fields were flooded in 1993. He was fined $1,000 for illegal fishing. “My father and I … were charged by Fisheries and Oceans Canada,” he recalled. “We were jointly responsible for having caused the death of fish for reasons other than sport fishing.”

The horror.

The penalty for a second offense — even if it occurs 18 years later — is a much stiffer $100,000. And there are more rules beyond just getting the license: “We have to collect all of them, and we have to fish both sexes, that’s what [the permit] says,” Reid explained. “I have to transport them so as not to damage them, by containers with water inside. If some of them die, I have to bury them.”

Yeah. And the permit expires in two more weeks. The floodwaters probably won’t have receded by then.

Incredibly, government officials think by requiring the permit they’re doing Reid and others like him a favor. “The idea is to help farmers,” said Jean-Philippe Detolle, spokesman for the Quebec’s version of the DNR. “The license was issued to reassure them they won’t be fined.”

“If we wanted to challenge it,” Reid says, “we would have to sue the federal government and pay lawyers.”

Challenge it? Such ingratitude…

   “I try to read The 5 every day,” a reader writes. “But something has been bothering me. There is much talk of the federal government going into default if Congress fails to raise the debt ceiling.”

“My question is: WHAT is being defaulted on? To my way of thinking, the government has run out of money and will be unable to borrow more, so therefore, it must stop spending. Is it all the ‘entitlement’ programs that will be defaulted on? Defense spending? Congressional golf junkets to China? What?

“The fact that the government must stop spending and find a way to live within its means is a good thing to my way of thinking.”

“But then, I’m not a politician, so my thinking is a bit more rational.”

The 5: Amen. Busting through the debt ceiling does not mean instant default. Congress has been raising the debt ceiling on a consistent basis since Ronald Reagan declared “it’s morning again in America” some 30 odd years ago.

Interest on the debt totaled $414 billion last year. Tax revenue totaled $2.16 trillion, more than five times the interest due. So as badly as Uncle Sam is in hock, he’s not in imminent danger of default… but he is in imminent danger of not being able to meet the obligations already on the books.

Nor will Mr. Sam be able to continuously bail out state and local government from their own largesse forever. Or stimulate failed industries… or save Wall Street bankers.

Of course, when politicians describe a breach of the debt ceiling as “catastrophic,” what they mean is that they won’t have the money to:

  • Pay all promised Social Security benefits
  • Pay all promised Medicare benefits
  • Garrison troops in 662 bases in 38 countries
  • Bail out bankers who made poor business decisions
  • Help feed 44 million Americans every month
  • Sustain the unemployed for up to 99 weeks
  • Irradiate and/or grope air travelers
  • Pay farmers to grow corn to fill our gas tanks
  • Devise new standardized tests to dumb down new generations of kids
  • Guarantee “homeownership” for two-thirds of Americans
  • Pay homeowners in flood plains to rebuild… and rebuild again.

The Treasury department will have to decide which bills to pay with (depreciating) currency and which to pay with IOUs. No, it wouldn’t be pretty. But as Addison explained eloquently at the beginning of the year, it’s the alternative that’s truly catastrophic.

   “When will China,” asks another reader, “announce their rare earth export quota for the second half of 2011?”

The 5: The latest announcement came two weeks ago, when China expanded existing quotas to include iron alloys containing more than 10% rare earths.

“Keep in mind,” cautions resource guru Byron King, “that on the best of days, it’s hard to track rare earth ‘exports,’ let alone prices…”

“Rare earths (RE) are a small global market by most other standards… a couple hundred thousand tons per year, compared to, say, a billion tons of steel per year.”

“The RE business is very private with minimal reporting. Vendors consider sources, quantities, prices, quality of goods, destinations and even their uses proprietary and competition sensitive.”

“The Chinese almost never sell ‘just’ the concentrated ores, or even refined oxides. They want to sell you a value-added product… upgraded to higher and higher scales, with appropriate markups.”

“Chinese export reportage includes numbers like ‘value,’ which can be confusing because we’re dealing with skyrocketing prices. So lower actual volumes may translate into higher export ‘values’ because the price per kilo is higher.”

“Also, the contract amounts and prices may not reflect the reality of what’s getting moved in commerce… Contract may specify 25 tons, and the exporter delivers only 20 tons, at a different (higher) price than previously agreed. The Chinese attitude is take it or leave it, because there’s another buyer out there…”

“It’s getting ugly. It’s getting desperate.” But it’s not too late for carefully chosen rare earth stocks. You can learn about Byron’s favorite in a package of special reports we’re offering to new readers of his premium advisory, Energy & Scarcity Investor.

Move on this today and you can snag a subscription for half of the regular fee.

Have a good weekend,

Dave Gonigam
The 5 Min. Forecast

P.S. The White House has come up with a novel defense for the 2010 health care “reform” law: If you don’t like the government forcing you to buy health insurance, work less… so you come in under the law’s income threshold.

Seriously. “The minimum coverage provision only kicks in after people have earned a minimum amount of income,” argued acting solicitor general Neal Kumar Katyal yesterday in federal appeals court.

Thus did the administration claim that the individual mandate — the linchpin of the law — is really voluntary.

O, how far we’ve strayed from “The Idea of America”….

That’s the title of a newly revised and expanded collection of essays thoughtfully assembled by Bill Bonner and Pierre Lemieux, a senior fellow with the Independent Institute. The writers run the gamut from Jefferson to Thoreau to Mencken to Rothbard.

“My old friend Bill Bonner,” wrote Rep. Ron Paul yesterday, “who has done so much to warn us about our future as an Empire of Debt, now turns his attention to America’s past. In doing so, he points us in a new direction: one in keeping with the vision of our libertarian roots as a nation…

“I highly recommend The Idea of America to anyone interested in the animating spirit of America’s origins…. I think readers will find themselves both enlightened and angry about the state of our republic today.”

The release date for this Laissez Faire Books exclusive is July 1. You can pre-order your copy today — and secure an instant 20% discount — by following this link.

P.P.S. The Agora Financial Reserve is once again open to new members. We do this — at most — twice a year. As usual, we will limit availability to 1% of our readership.

The doors close once again on Thursday, June 16. We invite you to review the exhaustive list of privileges and benefits that come with a Reserve membership in this invitation.

rspertzel

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