Rare Earths Will Be Hot for Years to Come

Brian Hicks

Updated September 22, 2011

There’s a household product you use every single day that has increased more in value this year than gold.

It’s even on par with silver, which is up a smokin’ hot 38%.

Unlike bars of gold or silver, you can buy this product at any Wal-Mart, Home Depot, or Target…

But in the weeks and months to come, I expect speculators to buy up all the available supply at these stores in attempts to sell them to consumers at much higher prices.

Think of it like professional scalpers who purchase U2 tickets the first day they go on sale, then sell to panicked fans weeks later at a 300% markup…

The major difference between concert tickets and the product I’ve been describing, however, is that these are much harder to live without.

Bulb Plan Puts Squeeze on Consumer Wallets

I’m talking about compact fluorescent light bulbs (CFLs).

Prices have shot up nearly 40% this year.

And unless you have a large stash of post-January 2012 bulbs lying around, you’ll be forced to pay even more as prices continue their upward trend. 

China has sent the price of compact fluorescent light bulbs soaring in the United States by closing or nationalizing dozens of the producers of rare earth metals used in energy-efficient bulbs and many other green energy products.

This is not the first time China has shut down most of the industry and crimped global supply of the vital resources by halting exports.

But this time, it’s not simply affecting electronics, U.S missile systems, and cell phones (that’s right, your cell phone utilizes indium in the screen and other rare earths in the circuitry); it’s putting a major squeeze on your wallet for a household product without a substitute…

And we have former President Bush’s 2012 bulb plan to thank.

A Great Green Initiative… Right?

Back in 2007, Bush inked an 822-page energy measure that included a future ban on 100-watt incandescent bulbs by 2012; 75-watt bulbs by 2013; and 40-watt bulbs by 2014.

The program’s intent: to make way for bulbs that would use 25%-30% less energy, shave an estimated $18 billion off electric bills, and cut consumer electricity usage by 60%. 

The compact fluorescent bulbs, we’re told, could pay for themselves in about a year. And with the average cost of LED at $20 to $60, you could save up to $400 over the life of the bulb as compared to the soon-to-be illegal incandescent bulbs.

But so long as China holds rare earths captive, temporarily shutting down most of the rare earth industry, these new bulbs will continue to skyrocket in price.

Consumer Reports says CFLs are up 37% this year. And they’ll only go higher as companies like General Electric pass on the 1,000% increase in the cost of europium oxide used in lighting.

Of course, every crisis contains an opportunity. Something as ordinary as a light bulb is no exception…

Profiting from CFLs

To profit from these new energy-efficient (and more expensive) bulbs, buy the company stocks that make the bulbs — like Cree (NASDAQ: CREE) — for the long haul. Or, you could take the Options Trading Pit approach and get aggressive with long-dated options, or LEAPS.

Say, for example, we believe Cree could rally above $45 between now and 2013 on the Bush bulb ban. Buying just the underlying stock at $33 and riding it to $45 would give you close to a 50% gain…

But for just a fraction of the cost of the underlying stock, you can buy a Cree January 2013 32.50 around $9 a contract.

Do the math to see what you’re getting here: A hundred shares of the underlying stock would cost you $3,300…

But a December 2013 32.50 contract (which carries 100 shares per contract) would only cost you $900 ($9 x 100 shares).

This is the same stock we bought at $20 and rode to $80 a share.

Another Way to Play It

The other way to trade CFLs is to invest in the materials needed to manufacture them — or better yet, by investing in the companies that mine these very materials.

Forget China; rare earths are in supply right here in the United States.

As we told you back at the beginning of August, we’re trading a tiny stock in an area that has the potential “to be one of the largest global resources of niobium and rare earth elements (REE)… [it] is buried beneath about 500 feet of overlying rock and is known only from drill cores, which, until recently, have remained proprietary.”  

It’s just one of several rare earth plays we’re holding in the Pure Asset Trader portfolio.

A favored Greenland rare earth play that trades at 70 cents (after hitting $1.80 in recent months) is another. This company has already set itself apart from all others in the junior mining sector.

Stay Ahead of the Herd,

Ian L. Cooper
Analyst, Wealth Daily

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