I get a lot of satisfaction from identifying assets and asset classes that are under-valued. That means looking at some rather hopeless looking charts and looking for potential. Identifying under-valued assets e.g. commodities in chronic supply deficit is also a great way to both diversify a portfolio with uncorrelated (or negatively correlated) assets.
I will lay out my case for rare earths and you let me know what you think.
For: - Bullish RSI divergence between Jan 2016 and March 2020 swing lows. Bullish RSI is when a lower low on the price chart is displayed as a higher low on the RSI. Not a bullet-proof indication, but a sign of weakening in the trend. I have identified some snorter-term bullish and bearish divergences in 2016, 2017, and 2019-20 that marked changes in the direction in price, - A significant draw-down (think retracement). Of course the over-all trend is down presently, and there is the possibility that it could go lower, but I see signs of a recovery. - Increasing volume. - A very bullish aspect is the recent move (+86% in <100 days) since March 2020 which was achieved with much lower than average volume. When the chart goes up on low volume it strongly suggests that sellers are exhausted. - Rare earth metals will be essential to a tech-driven / sustainable energy economy. I do mean essential, they allow jet engines to burn hotter, have greater reliability, and run more efficiently. The move to more efficient aircraft is a meta-trend that is only more important in present times - despite low travel demand (think aircraft retirements due to efficiency - the goal now is for airlines to lose the least money and more efficient aircraft. - China reduced production targets significantly in 2018 due to reducing rare earth reserves (global reserves once stood at 70% but have reduced to ~37% in 2018 prnewswire.com/news-releases/china-rare-earth-market-report-2019-2023-chinas-rare-earth-exports-to-the-united-states-accounted-for-78-of-us-rare-earth-imports-300856574.html) - Trade war. - Whatever happens in the vote in November, the world is turning away from China. Factories are relocating, the possibility of both cold and hot wars are being discussed. But whatever happens, rare earth metals are "strategic metals." That means defence and industry in the US and elsewhere needs them to function almost regardless of commodity price. In 2019 the Chinese Communist Party (CCP) threatened retaliation against the US via halting or restricting the export of rare earth minerals to the US. - Both the US and China have threatened tariffs or restrictions on rare earth minerals, - There are signs that they are making good on this threat (although recent actions are not associated with a clear public CCP announcement about why exports are being limited from the CCP - they never are), - China rare earth exports account for 78% of US rare earth imports in 2017. The US is currently dependent on this stream of imports. Any substitution of supply is going to take a long time to eventuate. - Global trade is generally becoming "stickier" in terms of politics, transport, and travel.
Against: - It is an ETF and I generally mistrust ETFs (e.g. SPDR GLD). While they can be useful, I will limit my ETFs to smaller positions. - It is an equity ETF, so it carries higher risk than other more stable investments. - The majority of Companies are from China. I am not a China expert, but I know enough to be concerned with the veracity and verifiability of their financial reporting, and maybe more importantly, there is a possibility that the CCP may annex some Companies or require them to do things that run counter to the organisations own best interests (i.e. restricting or blocking selling to some willing buyers). - Investing in China may not suit you depending on your position on moral investing e.g. Chinese human rights record, mining pollution, or that in China or mine worker death rate is 10x that of the US. - I expect a widespread draw-down in global equities due to a generalised deleveraging. So mining / refining equities will also be hit - possibly harder than average. - MACD weekly histogram is trending downwards and a MACD moving average cross-over to the downside is also possible. - I would put a short-term price at $28-34. - The underlying securities in the ETF have an aggregate PE ratio of 37, which is on the high side. - REMX has a 0.69 correlation with the SPX in the past 3 years, which is surprising given that the charts have been going quite different directions (0.7 and above is considered a strong correlation). If the time-frame was longer, say 5-10 years), the correlation would be lower.
On the fence: - I will continue to buy on weakness and am looking for price to hold above $23.91 (i.e. make a higher low) for my bullish outlook to hold. If that low is not exceeded, I would call the bear market over.
My outlook is rather bullish, but even if we get a 61% retracement (of 2011 highs), that would mean 500%+ gains from the $23.91 low. If I had to put odds on it, I would lean 70:30 towards bullish - maybe more - given the political situation. If someone should make an ETF with high quality rare earth equities that excluded Chinese companies I would increase that to 80:20 or more.
I could write more, but I'm not sure anyone is here at the end :P
Protect those funds
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Up 41.4% since I entered between in mid Sept-late Oct 2020
I loved that you put both sides of the argument on this. Keep up the good work.
deCarbonMan
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Great analysis.
JenYen
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FANTASTIC assessment and thanks for doing all the leg work :) :) I was looking for EXACTLY this!
flyinkiwi10
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@JenYen, You are most welcome. I hope it is helpful.
katd95
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Like opposing viewpoints also. Does MP Materials have the potential to acquire a significant portion of rare earth metals by mining in the US?
flyinkiwi10
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@katd95, US reserves of rare earth metals (unless new deposits are discovered) is just over 1% of the global total and the only nation that refines rare earths is China. MP Materials may do well as a business, I haven't looked into them. But China's strategic stranglehold will still apply due to much greater production and the refinery monopoly. I think Vietnam (second equal in global reserves with Brazil) will become an important player. I don't see a refinery opening up in the west, as refining rare earths involves use of radiation and toxic pollution - both are complete non-starters.
@flyinkiwi10,
Thank you for the article! The sourcing and production/purification of rare earth metals appears to still be in the relatively early stages of discussion (at least in the media) and is clearly shrouded in politics. Any hints of any synthetic substances that may imitate the qualities of the rare earth metals? Or perhaps other elements that are less rare that have some of the qualities of the rare earths? Seems far fetched but insanely valuable...