Tulip Mania: Is A Rare Earths Bubble Forming?

 If you decide to use the Wikipedia definition, the term “bubble” in economic parlance can be traced back to the early 18th century, but if you use the Dutch tulip episode, that takes you back another century. In other words, bubbles, particularly those related to commodities, have been around almost as long as there have been markets where speculation was permitted.

So it’s really no surprise that the rare earths business  has become a target for those that love to point out bubbles are coming. Maybe it’s the astonomical rise in shares of Molycorp, the largest U.S.-based rare earths miner, that has some naysayers concerned. Investors fret about the valuation and the fact the company still isn’t profitable.

Heck, some might even argue that the roughly 35% jump for the Market Vectors Rare Earth/Strategic Metals ETF ) since its November debut is bubblicious.

Anyone can call for a bubble in any asset class. Eventually, they’ll all be right, but since few, if any, can actually pin point when the bubble will actually burst, there will be considerable pain on the way from now  until the bubble pops. After all, there were pundits that were saying gold was in a bubble at $1,100-$1,200. That worked out pretty well, huh?

When it comes to REMX and its constituents there is a situation that the naysayers refuse to acknowledge. If silver supply started to outstrip demand (just an example), silver prices  probably plunge. On the other hand, supply is so tight in the rare earths world thanks to China, if Molycorp or another player come out tomorrow and say they can double supply in two months (it won’t happen, just a hypothetical example), there is 99.9% chance REMX and its holdings go up.

In other words, the rare earths biz is one place where increased supply would be good news right now.

Molycorp CEO Mark Smith recently told Mineweb that demand is expected to remain robust over the next few years and for every iPad, iPhone, Prius and pair of night-vision goggles that gets bought, it’s just another sign rare earths are on fire.

After breaking out last month, REMX has pulled back a bit, but if the $29-$30 area is seen again in the near-term, the rising short interest in the ETF and Molycorp will have to be covered, fueling both securities higher.

Will the rare earths bubble pop someday? Probably, but since no one can pick the date on the calendar and the current trend is obviously higher for REMX and friends, why mess with fire?