The Next Gold Rush

The Next Gold Rush: Rare Earth Metals

Beijing is concerned. The Pentagon is alarmed. Investors should be aware. The keys to the technologies of the future are suddenly in hot demand and short supply.

They are the heart of many high tech products – they are a family of metals called rare earths. Wind turbines won’t produce power without them. Electric cars can’t store energy without two pounds of rare earth metals. These are just a few examples of how crucial these minerals are to the economy of the future.

Rare-earths are a group of seventeen metals whose magnetic power is essential to light-weight, ultra-small circuits. They are crucial for products like iPods and digital cameras, flat-screen TVs and cruise missiles.

China has a near monopoly on the production of rare earths. That wasn’t a problem until very recently. But just last month China suddenly cut export quotas on rare earths for 2010 by 40 per cent! Beijing said domestic industries needed the commodities.

That set off alarm bells in the Pentagon which suddenly realized that rare earths are a strategic asset. China controls fully 97 percent of the world’s supply.

Fears of a Chinese stranglehold on rare earth elements hit a crescendo over the weekend. Reports claimed that China had cut off rare earth shipments to Japan during a dispute over a seized fishing boat. China flatly denied that report.

But fears of a rare earth shortage are now peaking. One of the largest global suppliers of rare earth metals is American Elements. On Monday, the company tried to reassure U.S., European and Japanese customers with the following statement:

"We've been inundated with requests for assurance of our continued capabilities, particularly last week," said American Elements' Chief Operating Officer. "We continue to produce and ship cerium, lanthanum, didymium and neodymium," he said.

So all is well for now.

But look out investors! China is still making waves.

China Upsets World Markets

A little-noticed news report from China over the weekend changed everything. The Xinhua report says that China is definitely worried about running out of rare earths:

“The exhaustion of China's rare earths would be a major blow to the world's green energy industry, so China must regulate to curb excessive and disorderly mining of the non-renewable resource.”

Actually, rare earth metals aren’t terribly rare. But they are extremely toxic and expensive to mine. That’s why China now dominates the industry.

China was able to put American mines out of business due to low costs and easy environmental regulations in Chinese mines. But the official Xinhua agency makes it plain that China is now changing the rules of the global game for good.

“Steps China takes to regulate its rare earth industry include reducing export quotas, cracking down on illegal mining and smuggling, halting the issue of mining licenses and imposing production caps.”

In other words, global supplies will dry up. Prices will skyrocket.

The Market Shoots Up

Stock market plays in rare earths are hard to find because of China’s near monopoly. On the Hong Kong Exchange China Rare Earth Holdings Ltd. (HKG: 0769) gained more than 12 percent in Monday’s trading.

American Elements supplies much of the world’s demand, but its mines are based in Mongolia. (An unlisted company, it may be affected by the Chinese quotas.)

Recent action on world stock markets indicates a sudden scramble to develop sources of rare earths in the U.S., Australia, South Africa and Canada.

That’s exactly what China wants according to the Xinhua report:

“The time is right to form an international competition mechanism for the rare earth industry to ensure sustainable development of new energy technologies.”

In other words, China wishes to retain supplies of rare earths for its own value-added industries. Beijing has put the world on notice that it must develop its own mines and form a competitive global pricing market.

American Elements used to rely on the Molycorp mine in Mountain Pass, California before its closure in 1999. Now that mine is being reactivated and share prices are soaring:

Courtesy: Finviz.com

http://finviz.com/quote.ashx?t=mcp

Other investment possibilities include Rare Element Resources Ltd. AMEX: (REE). The company rose almost 12 percent in Monday’s trading

For our global readers, an Australian investment possibility is Arafura Resources Limited ASX: (ARU). This firm gained over 10 percent on Monday. It is traded on the Australian Exchange.

In Canada, investors may have in interest in Great Western Minerals Group (GWG). The company is a “penny” mining stock traded on the Vancouver Exchange. Another Canadian Venture with operations in South Africa is Ucore (UCU).

Investors should keep in mind that these are speculative ventures. Most rare earth metal firms outside of China are development companies. Some have negative income.

The new gold rush is not without risk. But there’s no question that China is changing the rules of the game.

Rare earths just became much more rare. Hot competition for rare earth metals is a certainty in the future.

The China Gold Rush: Investors Options

by George Wolff | 08-15-10

China’s first gold rush is underway. If you read my article last week you already have some sense of how big the coming stampede is.

If you haven’t already read about it then read these bullet points. Changes in China will make 2010 a golden year for investing in gold:

1. China is actively promoting consumer investment in gold

2. China will let many more banks import and export gold for consumption

3. China will also open gold trading to foreign companies in China

4. China is going shopping globally for “large scale” new gold sources

5. Beijing is helping to create new consumer products to boost demand

6. China is stockpiling more gold in its reserves

There are plenty of good reasons why Beijing believes that now is the time for China to go for the gold. (If you wish to read why, click HERE for my first article.)

For investors, the important fact is that China will push up global demand. Even though China is the world’s largest gold producer it cannot mine enough of its own ore. China had to import 100 tons of bullion a year even before Beijing’s latest gold drive.
The new demand from China will drive gold prices higher worldwide. The important starting point is gauging just how much demand the Chinese will add to the global market.

Just How Bright is that Golden Gleam in Chinese Eyes?

We have seen how big the Chinese appetite for gold has grown in the past. China’s share of worldwide gold demand jumped to eleven percent last year, up from a mere five percent in 2002.

Chinese gold consumption is likely to double in the next decade. The market now consumes 420 tons. The World Gold Council says Chinese demand will rise to 840 tons as consumer incomes rise.

But it’s not just booming incomes that are driving the gold bugs in China. For consumers, gold has always been a highly important, traditional status symbol. But now Beijing wants to drive even more money into gold to prevent investors from pumping their funds into the overheated property sector.

“Investment demand for gold is expanding very fast, we are now in a bull market, and prices will rise in the mid and long-term,” a precious metals expert in Guangzhou told Reuters last week.

“China’s gold market is going to play an important role in the global gold market,” according to the World Gold Council. The gold market usually undergoes an annual average growth rate of just 13 percent in China. But that 13 percent rate of increase is already skyrocketing.

China Golddeal, Inc. declares, “There has been a big jump in interest in gold over the past year.” Another busy dealer, China National Gold Group Corp., says sales of gold products such as bars and coins jumped by as much as 40 percent in the past six months.

Even more astounding, the total volume of gold traded on the Shanghai Gold Exchange jumped 59 percent from a year earlier in the first half of the year.

This new gold-rush volume is equivalent to 3,174 metric tons traded annually. But China’s gold output will rise by only five percent this year to about 330 tons.

Global gold prices are certain to feel the pressure from new demand. So what options are open to western gold investors?

How to Profit From China’s Gold Rush

One of the options is to invest in gold dealers in China. As the middlemen in the booming gold trade, Chinese gold dealers stand to make a profit from retail markups as well as from increases in the value of their inventory.

Only a few Chinese gold dealerships are open to western investors. We hold one in the China Stock Digest model portfolio and we encourage you to review the Digest website to find out more.

Investors who want to put their money into physical bullion to take part in the China gold rush have several well-known options through ETFs including GLD, IAU and SGOL. These give the investor a stake in an actual stockpile of bullion gathered by the ETF issuer.

Investing in individual stocks of gold miners is a complex art. Every mine has its own estimated reserves and bullion holdings. Fluctuations can cause share prices to swing. Disruptions of mine operations can hurt shares unpredictably and badly. Major names in this field include Kinross Gold (KGC), Barrick (ABX) and Newmont (NEM).

Gold mining ETFs are one way to manage risk in this field. Market Vectors Gold Miners ETF (GDX) tracks the NYSE Gold Miners Index. The fund provides exposure to publicly traded companies worldwide involved in the mining for gold. It holds a blend of small, mid and large cap stocks.

A more dynamic, but also a riskier option, is Market Vectors Junior Gold Miners (GDJX). Because it represents smaller and less developed mines, the Junior ETF will lose value quickly if gold markets are poor, but will tend to rebound very strongly in rising markets.

There are other ETFs that allow investors to short gold or to experience double the gains or losses from fluctuations in gold prices. These are fairly high risk and I’m going not going to recommend them.

However you choose to invest in gold, there are two factors working for you: a strong China, and weak western economies. Gold has gone up over the past year as fears about the recovery of western economies have driven investors to the safe haven of gold.

China has no such weakness. But it is cash rich. This very large market has been given marching orders by Beijing to go forth and buy gold. My bet is they will do just that, and do it in droves.

Gold rushes are a tradition in China. Investors always pile in to buy the thing that is growing the fastest. That’s what happened with the stock market, with real estate, and now I believe we will see a stampede for gold that will shake world markets.

Keep Investing Wisely,

George Wolff

Don’t Buy Baidu. Here’s why Google is a Better Bet

When the pundits are all singing the same song, I say it’s time to move on.
Right now they are all taking pot shots at Google (GOOG). CNBC’s Jim Cramer slams Google because of the company’s decision to put China on the back burner. The experts on television and the Internet warn that Goggle has followed Microsoft (MSFT) into middle age, and faces a dull future.
Hogwash.
Those who are down on Google now say that China’s leading search engine, Baidu (BIDU) is a better bet. I say it’s a risky bet.
I’ve got nothing against Baidu. In fact it was one of my best calls was when I recommended a buy of Baidu shares one year ago. Back then, the stock was trading at a level of more than $350 a share. After a ten-for-one split, Baidu is now selling at more than $73 per share. That’s a gain of more than 100%.
Baidu cheerleaders boast that the company is expanding in the world’s fastest growing Internet market. True enough. A new report says the number of Internet users in China has soared past the 420 million mark! That’s a huge number, and it is growing. But, that does not mean investors should sell Google and buy Baidu at any price.
The Contrarian View
Google investors took a big hit last week when the company issued its Q2 earnings report. Shares prices plummeted by $34.41, shedding almost seven percent of their value in Friday’s trading.
It has been a rough year for Google. Shares have lost more than 25 percent of their value. That’s worse than the NASDAQ and even worse than Microsoft’s performance. But Baidu has performed like a champion by comparison.
Now, one of my competitors is advising clients to back up the truck and buy more Baidu. Here’s his pitch: “Last quarter, BIDU posted a whopping 165% surge in net income. Sales also rose by an incredible 60%, blowing past analysts’ expectations and resulting in a 33% earnings surprise. The stock jumped 14% on that news and a repeat this quarter should do the same.” So he says.
But not so fast! Baidu’s chart suggests that the days of endless share price gains may have ended. Over the past quarter, prices found a peak above $80 and became range-bound at best. Technical indicators suggest an ongoing easing of Baidu’s peak prices.
What about the chance of another earnings surprise? Baidu’s P/E multiple of 96.75 suggests that huge earnings increases are already built in to the stock’s valuation. A forward P/E valuation of 37.32 also suggests great future expectations are already priced in.
When a stock is this highly valued, anything short of a revenue jackpot could obviously result in a severe drop.
Take a look at Google’s recent plunge. Before its earnings announcement Google shares sported a relatively modest 22.39 P/E multiple.
And what was the shocking news that caused Google to lose almost seven percent of its value? Profits increased! Google posted a profit of $1.84 billion, up from $1.49 billion a year ago. Revenue jumped to $6.82 billion from $5.52 billion.
More than a billion dollars in new revenue weren’t enough to support Google’s modest valuation. A one percent increase in operating costs, and a miss of few cents on earnings per share, spooked the market.
To say the least, markets are extremely nervous.
What the Cheerleaders Don’t Tell You
Starry-eyed Baidu boosters are not telling you how thin the ice is. Sure, income may be up by 165%. But Baidu’s total income barely made it above $70.4 million in the last quarter.
China’s Internet population may be huge, but Baidu’s profit of $70.4 million isn’t even in Google’s billion-dollar league.
Critics like Jim Cramer claim that Google is missing out on hundreds of million of dollars worth of profits in China. But Google had only 30 percent of the Chinese market and it has not exited China entirely. What’s more, Baidu’s profits suggest that the prize is simply not yet all that large yet.
How is that possible? My research into Chinese Internet marketing suggests there are two key problems. The Chinese people are not yet accustomed to buying and advertising goods online. That’s one reason that Baidu’s Internet sales were only $189.6 million in their latest quarterly report. Compare that to Google annual revenues of $6.82 billion. Marketing experts say that Baidu has not mastered advertising on the web nearly as well as Google has.
The best way to compare the real valuation of the two firms is to look at the price-to-earnings-growth ratio (PEG). The PEG ratio shows investors are now paying almost twice as much for Baidu’s earnings growth as they are for Google’s.
Baidu’s PEG is a very high 2.02. Google’s PEG is a surprising 1.03!
Those who compare Google to tech dinosaurs like Microsoft are ignoring the differences. Every computer user knows very well that the Microsoft is struggling to produce new operating systems and software that anyone wants.
Meanwhile Google’s new products are being snapped up around the world. The Android OS for cell phones is quickly catching up with the iPhone in global popularity and is supported by many more telecom companies. Google’s other products are constantly being upgraded. The firm’s increased operating expenses in the last quarter were related to the purchase of valuable advertising companies like AdMob.
Google didn’t become a “mature” company or a tech dinosaur when its earnings crossed the billion dollar mark. It is still one of America’s technology leaders and is still growing earnings aggressively.
Right now I believe that Google is dirt cheap compared to Baidu.
Forget about investing with your eye on the rearview mirror. Baidu’s past performance is impressive. But now it is priced for huge success, or for huge disappointment if it misses expectations by even a fraction.
Baidu carries frightening risk at today’s valuation. But Google has been beaten down to a point where the chances of investor rewards with this tech leader are obviously greater and the risks are smaller.
I’m ignoring the talking heads. I’m selling Baidu and buying Google.