After weeks of intense fighting between the two economic superpowers, major indices plummeted in late May 2019.  All after the press reported the U.S. was considering restrictions on Hikvision – a Chinese surveillance equipment provider – from buying U.S. components.

“The U.S. is considering cutting off the flow of vital American technology to as many as five Chinese companies, reported Bloomberg, “widening the dragnet beyond Huawei to include world leaders in video surveillance. The Trump administration is concerned about their role in helping Beijing repress minority Uighurs in China’s west.”

But China wasn’t about to back down

Days after that U.S. threat, China’s People’s Daily reported the country could cut off rare earth minerals.  “We advise the U.S. side not to underestimate the Chinese side’s ability to safeguard its development rights and interests. Don’t say we didn’t warn you!” the People’s Daily said in a commentary titled “United States, don’t underestimate China’s ability to strike back,” as quoted by CNBC.

Should China cut off rare earth supply, it could be disastrous.  Remember, rare earths are necessary to build and operate hybrid cars, 700 pounds of neodymium are needed to build a three-megawatt windmill, iPhones, medical devices, computers, and cell phones.

Also remember that China has the largest rare earth mining capacity in the world, especially after the U.S. pulled back from mining.  That only increased our dependence on China’s supply.

“China, as the dominant producer of rare earths, has shown in the past that it can use rare earths as a bargaining chip when it comes to multilateral negotiations,” said George Bauk, Chief Executive Officer of Northern Minerals Ltd., as quoted by Bloomberg.

Now, as a result of the threat, rare earth stocks are moving aggressively higher.

JL Mag-Rare Earth in China rocketed 10%.  Australia’s Lynas – one of the few rare earth miners outside of the U.S. – was up by more than 15% on the day.

Unfortunately, none of this comes as a surprise, as the two warring economic superpowers go for the throat.  And, as long as this continues we must be prepared for exceptional volatility, as we’ve noted in these pages.  Some of the best ways to do so include:

  • The iPath S&P 500 VIX Short-Term Futures ETN (VXX)
  • The ProShares Ultra VIX Short-Term Futures (UVXY)
  • The VelocityShares Daily 2x VIX Short-Term ETN (TVIX)