The Best Explanation Of Why Rare Earths Are A Bubble Just Waiting To Explode

Once again, the rare earth companies are exploding higher today, thanks to a big media push from MolyCorp (NYSE:MCP). Before you get excited though…

There are really good reasons to be skeptical of the mainstream thinking.

This presentation from economist Ed Dolan provides the best, most-concise explanation of the issue that we’ve seen.

It basically comes down to this:

• Yes, China (NYSE:FXI) does control 95% of rare earth production.
• But that’s mainly because it has the loosest environmental regulations. They are in abundance all around the world.
• Rare earths aren’t really that rare… they’re more prevalent than gold.
• And demand over the long-run is elastic. Companies are in fact finding alternatives to them.

So before you jump into the rare earth ETF (NYSE:REMX) to ride the bubble, at least get some background.

China’s monopoly is fragile.

Image: Ed Dolan’s Econ Blog

The latest scare started in the dispute between Japan and China

Image: Ed Dolan’s Econ Blog

What are rare earths?

Image: Ed Dolan’s Econ Blog

They’re not that rare, really.

Image: Ed Dolan’s Econ Blog

And China hasn’t always been so dominant

Image: Ed Dolan’s Econ Blog

But China has been very loose with environmental regulations

Image: Ed Dolan’s Econ Blog

And its cost basis is very low

Image: Ed Dolan’s Econ Blog

The environmental looseness is a big deal

Image: Ed Dolan’s Econ Blog

In the long-run supply will be rather elastic, though for now it is indeed tight

Image: Ed Dolan’s Econ Blog

In the long run, we can actually find alternatives

Image: Ed Dolan’s Econ Blog

Prices are likely to stay volatile in the short-run

Image: Ed Dolan’s Econ Blog

So China is dominant today, but it could collapse

Image: Ed Dolan’s Econ Blog