How to invest in precious metals
Monday, December 13th 2010, 12:22 PM
Imagine a world without cell phones, flat screen TVs or jet engines.
Those products and many more mainstays of modern life wouldn't be possible without components known as rare earth elements.
Given their highly valued status, an exchange-traded fund was created to invest in producers of these strategic metals. Market Vectors Rare Earth/Strategic Metals ETF was started in late October and already has more than $140 million in assets.
This fund holds shares of producers of strategic metals, like titanium and molybdenum, as well as miners of an esoteric subset of strategic metals called rare earth elements, including cerium, yttrium and neodymium.
Increasing demand for energy-efficient products — including wind turbines and electric car batteries — should greatly increase sales of rare earth materials in coming years.
While some people may be familiar with the military applications of strategic metals, rare earth elements are more of a mystery. And they are not exactly rare.
"They are really quite abundant, but they are hard to extract," said Ed Lopez, marketing manager for Van Eck Global, sponsor of the new fund. What's more, China controls more than 95% of their supply.
It wasn't always that way. China ramped up low-cost production in the 1990s, and many Western companies decided to abandon rare earth mining.
But China began cutting exports a few years ago, and prices rose as demand increased. That price rise has made it profitable for some Western companies to start up production again.
One worry is that China could flood the market and drive out newly revitalized competition.
"That is a danger," Lopez conceded.
But he expects strong demand from the tech and clean energy industries, and notes that China will need rare earth materials for its own factories.
With all the variables, one thing seems certain: the new fund is likely to be volatile.