Escalating geopolitical tension puts commodities in the spotlight … the need for rare-earth metals … how to play it … don’t forget about industrial metals … triple digit winners with Eric Fry

The big news this morning was the blowout jobs data from ADP.

We’ll cover this in more detail in tomorrow’s Digest, but in short, private sector jobs obliterated expectations. They increased by 497,000 in June, more than double the Dow Jones consensus estimate of 220,000.

The markets are selling off as I write because Wall Street is interpreting the data to mean one thing: The Fed will return to rate-hikes at its next meeting later this month.

The CME Group’s FedWatch Tool puts the current odds of another quarter-point hike at 92.4%.

More on this tomorrow. For now, let’s turn to another major story from this week – the latest bubbling tension between the U.S. and China.

While the headlines will tell you this tension is about semiconductor chips, cutting-edge technologies, and national defense, it’s really about something else…

Natural resources.

Last week, news broke that the Biden administration is considering restricting sales to China of high-end semiconductor chips used to power artificial intelligence.

On Monday, China hit back, basically saying, “fine, if you won’t sell us the chips, then we won’t sell you the key natural resources necessary to make the chips.”

From Bloomberg:

China imposed restrictions on exporting two metals that are crucial to parts of the semiconductor, telecommunications and electric-vehicle industries in an escalation of the country’s tit-for-tat trade war on technology with the US and Europe.

Gallium and germanium, along with their chemical compounds, will be subject to export controls meant to protect Chinese national security starting Aug. 1, China’s Ministry of Commerce said in a statement Monday. 

Let’s step back and look at what’s happening, as well as the investment opportunity it’s creating.

China’s chokehold on America’s technological advancements

In September of 2020, President Trump signed an executive order declaring a national emergency due to America’s reliance on China for one key sector…

Rare-earth metals – which include the gallium and germanium that China just subjected to export control.

For readers less familiar, rare-earth metals (or elements) are a group of 17 metals that form under the earth’s surface. They can be difficult to find and extract.

These metals contain unique magnetic, heat-resistant, and phosphorescent properties that make them critical to the technology and defense industries. As you would guess, this makes them incredibly valuable.

Our macro expert Eric Fry has traded in and out of the rare-earth/industrial metals sector for decades, resulting in a handful of 10X returns (one of the latest was the 1,400% winner from Freeport-McMoRan which Eric’s Speculator subscribers enjoyed in 2021). Given this, he’s been following sector developments for many years.

Here’s what Eric wrote about rare-earth metals back in 2020 in reference to their role in U.S. defense and technology:

… rare-earth elements are also absolutely critical to the U.S. military. They are key components of missile guidance systems, lasers, electronic displays, radar, and satellites.

But as Bloomberg just pointed out, they’re also critical in the semiconductor chips that power your favorite day-to-day technologies, as well as electric vehicles.

So, how bad is the U.S. reliance on China?

Here’s Politico from last year:

As of today, China accounts for 63 percent of the world’s rare-earth mining, 85 percent of rare-earth processing, and 92 percent of rare-earth magnet production…

China could easily decide to restrict access to rare earths again with disastrous consequences.

While this is a major problem for our government, it’s also an opportunity for investors who recognize the bottleneck

As a matter of national security and economic strength, the U.S. must secure its own rare-earth metals supplies…period.

So, just follow the breadcrumbs. How do you invest in rare-earth metals?

The simplest, one-click way is with REMX, which is the VanEck Rare-Earth/Strategic Metals ETF. It holds a basket of rare-earth metals mining companies.

The drawback here is that you’re getting significant exposure to Chinese miners. For example, two of the ETF’s three largest holdings are Chinese, accounting for nearly 15% of the fund’s entire net assets.

As political tensions ratchet up, we could see Washington D.C. steer billions of dollars toward specific domestic miners/producers. So, far more explosive investment gains could be found by looking closer to home rather than investing in a broad ETF.

Eric points out we saw a preview of this last summer when the U.S. Department of Energy (DOE) doled out $2.8 billion in grants to various companies operating in the U.S. EV battery supply chain. Though these grants targeted more traditional industrial metal miners rather than rare-earth metals miners, it’s an illustration of what can happen when Washington D.C. throws its financial weight around.

So, looking beyond REMX, check out MP Materials (MP). It’s the U.S.’s largest rare-earth mining company, based in Las Vegas.

There’s also Energy Fuels (UUUU), headquartered in Lakewood, Colorado. While it’s more of a uranium play, Energy Fuels has been pushing into rare earths. Back in February, it announced the acquisition of 17 rare-earth minerals projects in Brazil.

But don’t limit your metals investments only to rare earths

If we look broader to industrial metals, Eric believes we’ve only seen the first act of the “commodity supercycle” that could send industrial metals miners soaring over the next few years.

Here’s Eric:

From early 1999 to mid-2008, the TR/CC CRB Index of commodity prices quadrupled, while the S&P 500 produced a return of roughly zero. That robust, market-trouncing commodity boom sprung from what had been a decade-long commodity bust.

Such is life in the commodity sector: Great, big busts, which lead to great, big booms…and then back to busts again. Professional investors refer to this phenomenon as a “commodity supercycle” …

I’ve stated several times that the commodity markets are in the early innings of a powerful, new supercycle, which erupted from the Covid-panic lows of April 2020.

We can see this supercycle by looking at the CRB Commodities Index over the last four years.

Beginning with its 2020 low, the CRB Index soared more than 160% before beginning to drift south last summer.

Back to Eric with more context, as well as what he expects looking forward:

[The 160%ish gain out of the pandemic low was] about half the 300% gain the CRB achieved during the last supercycle. At a minimum, therefore, commodity prices should double from current levels before this new party ends.

But I’m expecting this particular supercycle to produce a more spectacular result than that, thanks to surging demand for “battery metals” from the electric vehicle (EV) and renewable energy industries.

As an illustration of this surging demand, Eric references industry insider Robert Friedland, who believes the copper market is heading for a supply-crunch “train wreck” that could cause the metal’s price to soar 10-fold from current levels.

Despite this, if you’ve been watching copper’s price, you’ve seen it fall from more than $4.25 in January to $3.77 as I write Thursday morning.

But as our cutting-edge technologies require increasing volumes of copper and industrial metals at large, don’t expect these snoozing prices to last.

Here’s Eric’s take:

This seeming narcolepsy is leading many investors to assume the commodity supercycle is over already. Besides, why bother with “old school” investments like mining companies, when artificial intelligence (AI) investments are all the rage?

The answer is a simple one: The commodity rally isn’t dead; it is merely pausing before starting its next major move higher. 

So, how do you play the second act of this commodity supercycle?

There’s PICK, which is the iShares MSCI Global Metals & Mining Producers ETF. It holds mining heavyweights including BHP Group, Rio Tinto, and Glencore.

If you want to invest in a specific miner, Freeport McMoRan (FCX), which we referenced earlier, is a top-shelf option. Eric holds FCX in his Investment Report portfolio today, with his subscribers sitting on 209% returns.

There’s also COPX, which is the Global X Copper Miners ETF. It’s more of a pure play on copper miners (copper is critical in just about all electronics products).

Speaking of copper, congrats to Eric’s Speculator subscribers who are up 388% in their copper miner, Ivanhoe Mines.

Stepping back, whichever investment route you take, just be aware of where we are in this commodity supercycle, and what that suggests for the investment opportunity before you today.

Here’s Eric with the final word:

Many stocks in [the commodities] sector could deliver AI-like performances over the next couple of years, as the commodity supercycle enters its next major explosive phase.

So, don’t count commodity investments out just yet.

Have a good evening,

Jeff Remsburg