Where Precious Metals and Rare Earth Metals Meet

From the outset it should be made clear that rare earth metals do not included gold and silver. Rare earth metals, now a focus of the simmering trade war with China, are in fact a group of 17 elements found on the periodic table. Moreover, they are not particularly rare especially in comparison to more commonly known metals like copper. The reason they carry “rare” in their name is because they are rarely found in concentrated deposits. Therefore, extracting and isolating a rare earth metal demands a considerable economic outlay.

China is in a position to leverage their control over these elements because they supply about 80 percent of our imports of rare earth metals. These resources are critical to components in everyday devices like fuel cells, smartphones, plasma screens, medical treatments, and even fertilizers. As technological innovation continues to grow, manufacturers have found more uses for rare earth elements. Additionally, rare earth metals are an increasingly prevalent component in low-carbon technologies.

Though rare earth metals have nothing to do with gold and silver, their role in the trade war does have implications for precious metals.

Given the prevalence of rare earth metals in so many goods, investor in the US have become fearful of the long-term impact of China’s recent threats to dramatically cut exports of rare earth metals. The threat has stoked fears of a global economic slowdown. These fears are evident from recent downturns in the stock market. Investors are seeking assets that are less sensitive to this kind of economic upheaval. For many, that means precious metals are a top choice.

As a result, gold reached a seven-week high on the last day in May as threats of new US-issued tariffs on Mexico surfaced. Recently, President Trump announced that he plans to initiate a 5 percent tariff on all goods from Mexico starting on June 10th. “People are doing fear trade now and running towards gold,” remarked Michael Matousek, head trader at U.S. Global Investors.

Investors who are retreating from stocks amid these developments need other investments to help them drive returns. Gold and silver are strong options for a few reasons:

• US interest rate futures are rising. This signals that most traders believe that at least one interest rate cut is likely imminent. In such a case gold would become a more attractive investment because it reduces the opportunity cost of holding a non-interest-bearing product.
• Historically, uncertainty depresses stock market gains. Such drops in the S&P 500 are likely to reinvigorate interest in gold and drive prices upward as we have seen in recent weeks.
• We are at the start of these trade wars and investors who adjust their asset allocation in favor of “safe-haven” investments like gold and silver early are positioned to preserve the wealth as an unpredictable story unfolds.

The bottom line: It is not clear where this journey will lead. However, what we do know is that the journey has in fact started and that the negative effects are already apparent in several investment markets. Now is the time to take cues from the global economic climate and consider precious metals.