As the world looks towards the turmoil in the Middle East and crisis in Japan, investors have once again run to the safe haven assets of precious metals and oil. In this flight to quality, many higher risk assets are quickly returning to bargain basement levels. One such opportunity is directly correlated with Japan's high tech economy. Despite the fact that long term rare earth metals prices are soaring, stocks in the sector have plummeted on fears that the tsunami will eradicate demand in Japan. However, these fears have provided a long term opportunity for investors before the rare earth crisis intensifies.

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Building Blocks of High Technology
While Scandium, Gadolinium and Yttrium don't exactly roll off the tongue, these minerals form the building blocks of high technology. From slick flat panel TV's and cell phones to wind turbines and MRI machines, these strategic metals are finding their ways into our daily lives more and more. Terbium is one of the key ingredients in low-energy CFL light bulbs and it takes roughly one ton of neodymium for every megawatt of generating capacity a wind turbine has. Hybrid cars use up to 25 pounds of these precious metals in their advanced electric motors in order to increase efficiency. Currently, worldwide demand outside of China for rare earths totals about 60,000 tons per year.

Chinese Domination
Demand for these materials is only increasing as populations continue to grow. The market value for strategic metals is expected to reach 200,000 tons by 2014, or roughly valued at $2 to $3 billion. Chinese requirements of rare earths are forecasted to exceed supply by 2012. These supply and demand imbalances are a real cause for concern. Mostly due to its incredibly lax environmental policies, China currently produces more than 95% of global supply of rare earths. During the second half of 2010, China slashed export quotas by 72% and for 2011, the first round of export permits saw cuts of 35%. These cuts have caused prices to skyrocket. One ton of neodymium is quickly approaching the $180,000 mark.

International Reactions
Governments around the world are taking China's dominance seriously. Recently, Congress initiated the ReSTART initiative aimed at getting a foothold in the rare earth minerals market again and the US Trade Representative plans to file a complaint with the World Trade Organization against China's export reduction policies of rare earths. Malaysia has partnered with Lynas Corp (OTCBB:LYSCF) to construct the first rare earth processing plant outside China in over three decades.

A Portfolio Proposition
Demand for strategic minerals like lithium and europium will continue to increase as they are critical components of a variety of new technologies. Energy efficiency measures, consumer electronics, new infrastructure and green renewable energy will be new major sources of demand. Given the recent pullbacks in many of the stocks and funds that track the sector, it might be a good time to add it to a long term portfolio.

ETF Options
The easiest way to the sector is through the Market Vectors Rare Earth/Strategic Metals ETF (Nasdaq:REMX). The fund tracks 26 different global miners in the rare earth and strategic metals sectors including Lynas as well as molybdenum miner Thompson Creek Metals (NYSE:TC). The fund has nearly 60% of its $400 million in assets located in Canada, Australia and the United States, but does offer exposure to some of the Chinese companies in the sector. Similarly, the Global X Lithium ETF (NYSE:LIT) offers exposure for investors interested in that sector.

Stocks
For investors looking for pure-play exposure, both Avalon Rare Metals (NYSE:AVL) and Molycorp (NYSE:MCP) are ideal candidates in the space. Avalon hopes to bring online the first separation facility outside China by 2016, and Molycorp recently announced that it plans to double its production in its California mine by the end of 2013.

Despite all the rare earth promise, there are plenty of minefields. Three Chinese miners, China Shen Zhou Mining & Resources (NYSE:SHZ), China GengSheng Minerals (Nasdaq:CHGS) and Qiao Xing Universal Resources (Nasdaq:XING) have all been cited as rare earth, in spite of the fact that none of them have rare earth operations. Investors looking towards the sector should stick to the more established players.

Bottom Line
The recent tech pullback caused the tragedy in Japan has created some interesting opportunities. One such prospect exists in the rare earth and strategic minerals sector. Used in everything from Apple's (Nasdaq:AAPL) iPods to lasers, the demand for these minerals are exponentially increasing. Investors with long term timelines can use the recent pullback to add either the Market Vector fund or any of the established companies to their portfolios. (For related reading, take a look at Understanding Rare Earth Metals.)

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