Rare Earth Resource Stocks: Should You Invest?

By Dale Gillham | Published 20 August 2018

There is a common belief that rare earth resource stocks could be the next best thing and make you a lot of money.  However, trying to pick the next best winner and selecting whether or not these investments will be viable in the long term is a different story. So, should you invest in rare earth resource stocks?

Recently, there has been a discussion about the ‘battle for rare earth resources’ between tech giants such as Apple, Samsung and Google. The three big players have been attempting to purchase resources such as Lithium, which is used in phone batteries, directly from suppliers. Due to these organisations size, capital resources and economies of scale, it is much more viable to purchase directly from mines to reduce the overall cost of production. 

Should you invest in rare earth resource stocks

A study conducted by researchers at Yale University shows that materials, such as zinc, copper and aluminum are in no genuine danger of depletion. Other rare earth materials utilized in current smartphone technology, however, are at real risk of scarcity. This means that it will become harder to source these rare materials in the future. 

However, humans are very adaptive and when natural resources start to become expensive and no longer cost effective, we seek alternatives that are cheaper. Think of lead, which is used in pencils. Given that lead was expensive and unsafe for use, we now use graphite. With the amount of smartphones being manufactured globally expected to continue to rise, the opportunity to buy and hold these rare earth materials has become quite illusive for some investors. 

Materials such as Chromium (Limited due to supply restrictions), Mercury (limited due to the environmental implications of mining), Gallium (limited supplies) and Cobalt (limited supplies due to political instability in the Congo), which are some of the key resources that are used in the production of batteries and circuit boards, have caught the attention of market speculators. 

Speculators are purchasing rare earth resource stocks in the hope that their scarcity will result in an increase in price. This raises the question should I invest in rare resources?

Lithium and other metals involved in making batteries will most likely rise in price over the coming years and so the share price of companies in this area should do well. I also believe rare earths will do well as they are also part of this new battery technology. So, on a world scale, we will see expansion into these areas and more governments and companies profiting from them. 

Picking the next big winner in rare earth resource stocks

However, trying to pick the next big winner in the market could mean investors introduce higher risks to their portfolio given that the speculators buying these types of shares are ill-prepared to handle the risks and the huge swings in the price that these securities can present. 

As a general rule, no more than 10 per cent of your total portfolio should be invested in speculative investments. Savvy investors are willing to take on higher risks to profit from the increasing amount of opportunities to buy commodities, such as these rare materials because, ultimately, you want to be investing into assets that are rising in value. 

These emerging/developing stocks are often at the low end of the liquidity spectrum and that means that investors are not necessarily able to exit at a price they would like. Indeed, many companies go broke and are delisted long before they take off.  This risk must be managed regardless of how much is invested. 

Investors actually need to spend as much time considering an investment, even if they are investing less per share into lower liquidity stocks.

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