Fortunes from the ‘New Oil’

delfeldOne of my favorite books is Daniel Yergin’s riveting tale of the major role oil played in the 20th century; The Prize: The Epic Quest for Oil, Money & Power.

It traces the growing reliance on oil for both global commerce and war. The book highlights the key roles played by tycoons such as Rockefeller and Getty as well as largely unknown entrepreneurs such as the Yale chemist Benjamin Silliman, Jr. and New York lawyer George Bissell who worked together to commercialize “rock oil”.

Oil also played a pivotal role in the century’s statecraft and unfortunate conflicts from Winston Churchill’s decision to shift the Royal Navy from coal to oil in 1911 to the Gulf War when a coalition of 33 nations pushed Saddam out of Kuwait.

But the following sentence in the book’s prologue really caught my eye.

“As we look toward the 21st century, it is clear that mastery will certainly come as much from a computer chip as from a barrel of oil”

But what’s behind the computer chip and technology that forms the backbone for so much that we take for granted in modern life? The answer is rare earths and, in particular, rare strategic metals.

These natural resources are critical to economic growth and advancement of technology. They are also invisibly intertwined with national strategies, geo-politics and power.

Just as a Mideast oil embargo has battered the global economy, so to would a supply interruption of critical strategic metals play havoc with technology markets.

What exactly are rare strategic metals? Well, they’re not precious metals like gold or platinum nor common metals like copper or lead. Rather they are obscure rare industrial metals like Gallium, Hafnium, Indium and Rhenium that are in all sorts of products from cell phones to advanced weapons systems, aircraft engines and hybrid batteries. Rare strategic metals are very difficult and time consuming to extract from common ores plus the refining process has a sizable impact on the environment.

Over the past few years, China has been the Saudi Arabia of rare earths as the country’s low cost labor and lax environmental standards allowed it to produce 90% of world production of many of these metals.  This near monopoly and China’s clumsy rare earth’s embargo on rare earth exports to Japan in 2010 after a dispute has spurred other countries to action.

The canvas of this “great game” is global.

•Russia recently announced a joint venture to stockpile $1 billion of rare earths by 2018.

•China’s State Reserves Bureau is building stockpiles and making strategic investments in private companies in Brazil (CBMM), Australia and South Africa (Gold One).

•Japan is investing in India and Mongolia rare metal projects and companies.

•South Korean government has taken a position in Canada’s Frontier Rare Earths.

•Germany is targeting Mongolia and developing a strategic partnership with Kazakhstan.

And in America, Congress has funded studies and is considering increasing its defense stockpiles of these critical materials.

But keep in mind that oil was not just a commodity. In the phrase of one tycoon, “Oil is money.”  The battle to secure these vital resources will undoubtedly make some investors very wealthy.

A key reason to invest in these rare strategic metals is that demand for them will increase as demand for technology and consumer tech products increase. This is why these metals are sometimes referred to as technology metals. The increasing demand for products made with these metals by a rising global middle class is also a very favorable long-term trend. Investing in these metals is a very effective “back door” way to capture the “catch up’ growth of emerging and frontier markets.

The military angle is also important since defense establishments around the world are increasingly dependent on technology metals for communications, drones, missile technology, weapons guidance and battlefield technology. This is another reason China is holding on to more of its production.

The green revolution is another trend propelling demand for rare strategic metals. Hybrid car batteries, solar cells, wind turbines are but a few of cleaner technologies using sizable amounts of these metals.

Investing in rare strategic metals offers investors other significant advantages:

>    they are critical to global industry/technology – future oriented

>    real hard tangible assets, secure store of value

>    tax-free, private, no government reporting requirements

>    non-correlated to each other & other asset classes

>    provide effective hedge on inflation & instability

>    hedge on potential conflict in areas such as South China Sea

>    bypass financial markets, the risky mining industry, and speculative junior mining stocks

Consider moving your investment strategy into the 21st century by blending in some rare strategic metals.

Opportunity awaits,

Carl Delfeld.

 

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