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Rare Earth Options

China Warns: Be Prepared

Written by Brian Hicks
Posted June 22, 2012

We've been in a depression since the crash of 2008.

Unemployment will surge from here. Europe will die off. And Americans will continue to suffer under the weight of poor decisions.

Anyone who has read my rants knows I'm not overly optimistic about the global community's near-term outlook. And that's because I'm aware of the reality that there is no economic recovery...

We're fed an endless stream of misguided misinformation designed to confuse and blur the real facts and figures of domestic and global economic standing.

But unlike some people who cry in their beer, whining about how bad things are, we are doing something about it.

We're not using the daily flux of the markets to guide investments — that's the biggest mistake investors are making these days. Instead, we're looking for the smaller opportunities buried in the muck.

And you can, too. You just have to know where to look.

I've been running an options advisory service for the better part of 12 years.

I've called the top of housing, the fallout in subprime, the chaos destroying Europe. And as the markets whipsaw these days, destroying middle class net worth and any thoughts of near-term baby boomer retirement, my options readers have been laughing all the way to the bank...

We're up 168% and 68% on Arena Pharmaceutical calls. Navistar puts gave us 67% in less than a day. And we just found our next profitable play in China.

Rare Earths Back in the News

We've discussed rare earth elements, their uses, and their significant role in modern-day technology at length in these pages.

This week, China warned the world its rare earth reserves are in decline. The BBC reported Wednesday:

The decline in its rare earth reserves in major mining areas is 'accelerating' as most of the original resources are depleted...

After more than 50 years of excessive mining, China's rare earth reserves have kept declining and the years of guaranteed rare earth supply have been reducing.

How are we trading China's warning? Two ways:

  1. By trading the Market Vectors Rare Earth/Strategic Metals ETF (REMX) long-dated February calls. The REMX holds most of the hottest rare earth names, including Molycorp (MCP). For every one dollar REMX moves up (a 7%) move, you can make as much as 20% on the same move, using an option.

  2. You can buy Molycorp (MCP) long-dated calls, too, as it finds long-term support. For every dollar MCP moves up (an 8%) move, you could be looking at a 15% in a long-dated option... and you don't have to deal with near-term time decay issues with a long-dated call. That's the beauty of it.

We're using longer-dated calls with these commodities to trade a long-term supply-demand trend.

More Metals Plays

I'm also recommending readers check out tungsten, the next big runner in the commodities space.

You can trade it using the REMX long-dated calls as well.

Also called wolfram, this metal has the highest melting point of all non-alloyed substances on the planet.

It's primarily used to make hard metal alloys such as high-speed steel that are used in the manufacture of rocket nozzles, metal coatings, and turbine blades. It's also frequently used in the mining drill industry. The metal has been in increasing demand as touchscreen technology explodes.

During the early oughts, China flooded the tungsten market with cheap material. That and the 2008 recession sent tungsten prices plunging and put many mines out of business.

From 2009 to 2011, the search for newer sources of tungsten was put on hold...

Now China (which controls 80% of the market) is restricting exports, buying up as much tungsten as it can.

At the same time, demand is booming.

The United States and Europe just classified tungsten as a metal that needs to be stockpiled, as demand increases 6% a year.

Since there is no substitute for tungsten, the search for more supply has been reborn.

The major problem is the time it takes to explore, develop, and mine the material.

The entire production process can take two to three years. But we need that material now.

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Buffett to the Rescue?

IMC International Metalworking, part of Berkshire Hathaway, just plunked down $80 million in Woulfe Mining's Sangdong South Korean tungsten project.

Woulfe has plans to ship up to 400,000 metric tons of tungsten (or 4,000 tons of metal) from the mine that closed back in 1992 as a result of low mining prices.

They're expected to begin output by August 2013.

Woulfe (WOF.V) is just one way to play this metal. Another way is to buy Malaga (MLG.V; OTC: MLGAF).

The safest way to trade these plays is with REMX long-dated call options.

We're buyers here.

You should be, too.

Stay ahead of the herd,

Ian Cooper
Analyst, Wealth Daily

Editor's Note: Over the weekend, I recommended investors position themselves in uranium. I advised they buy a long-term options contract on Cameco (CCJ) as it consolidated at support levels just above $19.50. I predicted the stock would move higher on oversold conditions and a range of catalysts that make me bullish on nuclear...

Two days into the trade, we were up $2 on the stock — and more than 35% on a long-dated call option.

Buffett's Envy: 50% Annual Returns, Guaranteed