Chris Kuflik - ScotiaMcLeod Montreal

The ‘Currency Wars’ taking place have dominated the financial press as of late. Now that the latest Economist cover has addressed this issue, it is time to prepare for its eventual demise. There is another ‘War’ - read protectionism, that is just beginning to heat up… Metal Wars.

History has shown that once a story, be it economic or corporate, makes it to the cover of a magazine, investors should head this as a warning to do the opposite of what the cover recommends. We typically find that mainstream magazine covers provide a reflection of what is comfortable and palatable to investors at a given time. One investing tip we often allude to is the sure-fire wealth destroyer of acting on the advice of a magazine cover. One great example of this was the Forbes Magazine declaration of Monsanto as "Company of the Year" back in the beginning of 2010. When this magazine cover was published, MON was trading at 82 dollars. After a brief rise to $86 in early January, the stock plunged to a low of approximately $45 by July. While there is a long list of similar stories that I would be happy to provide, I think that you get my point.

In an effort to stimulate exports and growth, the US government has pursued a policy of cheapening their dollar versus other global currencies. In addition, US politicians have repeatedly publically chastised and demanded that the Chinese allow their currency to rise. This can be viewed as protectionism. How has China responded? They have threatened to reduce exports of Rare earth elements (REE).

Rare earth elements are crucial to the global economy. So, what exactly is a REE? There are approximately 17 REEs, and they are critical to modern day technology, industrial manufacturing, and even Little League Baseball since they are used in an aluminum alloy found in baseball bats. They are also used in flat screen TVs, cell phones, batteries for hybrid vehicles, lasers, aerospace technology, solar panels and wind turbines. What's interesting is the fact that REEs are not all that rare, but they're extremely difficult to extract. The US used to mine for REEs but it became too costly forcing the closure of the mines.

These elements have recently come to the forefront not only for their impact on the global economy, but also on the political spectrum. For instance, China, which controls more than 90% of REE production, recently cut off REE exports to Japan because of a recent collision between two of their respective shipping vessels and the events that transpired afterward. This forced Japan to take desperate measures to find a new supplier of the minerals. Why? Simply because China can make or break most of Japanese technology products since REEs play such an important role in one of Japan's largest exports, automobiles, specifically hybrid vehicles. If Japan was unable to find a supplier, then their economy could possibly deteriorate even further; but fortunately for Japan, China recently ended their ban on REE exports. In response to recent trade spats with the Western economies, China has threatened to cut their export quotas.

So, the question is, "how does an investor take advantage of this?" Unfortunately there are few publically listed pure play producers and these companies are listed outside of North America. There are a few listed exploration companies, however, these companies are too speculative for us. One way to garner exposure to the REE segment, along with the broad mining sector, is through a global mining exchange traded funds (ETFs). Additionally, another element to examine is Lithium. Although it is not a REE, it is often considered rare and it is extremely important to modern technology, especially battery technology. There is a Lithium ETF which offers investors exposure to companies involved in Lithium extraction, most of which come from Latin America. In addition, we have found two American listed lithium producers which you may want to consider. While the mainstream media is focused on currency wars, I believe that the greater concern should be the possibility of a looming metal war and the protectionism that is becoming more prevalent.

Please call us for more information and to discuss if and when these types of investments should be considered for your portfolio. Please feel free to share this article with someone who you feel could benefit from its contents.

Chris Kuflik

Associate Director, Wealth Management

Wealth Advisor

514-287-2931

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Visit our website at www.chriskwealth.com

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