China Plays the Metal Card

… Which Cards Will the US Play? [The Rude Awakening] August 11, 2023 [WEBSITE]( | [UNSUBSCRIBE]( China Plays the Metal Card [Tiny AI Stock Targeted For Buyout Deal?]( [Click here to learn more]( [A massive buyout alert has just been issued]( on a tiny AI company that could skyrocket in the coming months, weeks, even days. And according to James Altucher, a man who has made millions of dollars on these kinds of deals… This could be a once in a lifetime opportunity for you to make a fortune. He’s revealing all of the details in the video below (including a leaked memo from Google). You can watch it by [clicking here](. [Click Here To Learn More]( - Byron King takes over the Rude today for an update to the gallium and germanium story out of China. - This piece is a follow-up to Sean’s introduction last month, but is far more in-depth. - Is the game over for the West with metals, or has it just begun? [Sean Ring] SEAN RING Happy Friday! Right now, I’m on a plane from Milan to Barcelona. So my good friend and colleague Byron King kindly takes over the Rude today. I wrote about a month ago about gallium and germanium and how China put strict export controls on them. That means the United States will have more difficulty acquiring them going forward. Byron tells a beautiful tale here, starting in Singapore, moving to China, then your high school chemistry classroom, and back to the United States. Enjoy! And have a great weekend! All the best, [Sean Ring] Sean Ring Editor, Rude Awakening Twitter: [@seaniechaos]( China Plays the Metal Card… Which Cards Will You Play? [Byron King] BYRON KING This past Independence Day, China made a highly strategic move. It was both subtle and brilliant, and it leveraged a profound U.S. industrial deficit, namely America’s lack of basic industrial capability to produce certain critical metals that truly make our world work. The implications are immense, and in a moment, I’ll describe what happened. Plus, I’ll give you a few ideas on how to position yourself as an investor. But first, I want to discuss acupuncture. My Chinese Medicine Man in Singapore Several years ago, pre-COVID, I traveled to Singapore. There’s no need to get into details, but my trip began in the mountains of western Canada, doing geology and kicking rocks in a variety of rugged, outdoor environments. Then I made a couple of long flights to cross the Pacific Ocean, passing through several airports, and eventually landing in the Lion City. Along the way, I picked up a bug. About a day after I arrived in Singapore, I was sick as a dog, coughing my guts out. But there I was, far from home, and I had work to do. I asked the hotel concierge about finding a doctor, and that’s how I wound up at a small clinic on the outskirts of the main business district. The place was clean and equipped with all manner of up-to-date medical devices. The staff spoke English and were very professional and courteous. I could not have asked for more. The Singaporean doctor was a splendid, genteel fellow who told me he trained in China. He was also a mineral collector, so we talked about geology. In terms of medicine, the doc poked me and prodded, all the usual things. He looked down my throat, listened to my lungs, reviewed a chest X-ray, and patted me some more, here and there. The diagnosis was (and I’m shortening it): “You have pulmonary inflammation. We’ll call it bronchitis, and I’ll give you a prescription for antibiotics.” Then the doctor asked, “Would you also like acupuncture?” The doctor explained (again, this is the short version) that traditional Chinese medicine identifies critical pathways within the body; by inserting small needles into certain spots, acupuncture redirects the body’s own healing energies. There are about 5,000 years of evidence that it works. Well, I wanted relief and was ready to try acupuncture, even for bronchitis. Soon, I was lying on a hard, flat bed with the doctor meticulously jabbing a series of needles into my shoulders, back, arms, and even legs. The needles were made of surgical steel, very thin, and the physician was quite skilled in sticking them into me, such that I barely felt the pinch. “Just be still,” said the doctor. “Allow your body’s impulses to flow normally, and the needles will redirect them to your inflamed areas.” So there I was, laid out on a bed in a comfortable room, sniffing incense in the air, with needles sticking out of me like a pincushion. And hey, what do you know? After about fifteen minutes, I could feel myself healing from the inside out. After another fifteen minutes, I felt even better. And so it went, such that the total procedure lasted about 90 minutes. Toward the end of my visit, an assistant came in, plucked out the needles, and rubbed some sort of ointment on my skin. The physician’s bill was shockingly low by American standards. I mean, talk about delivering value for the money? This guy was great. I walked out of that clinic feeling immensely better than when I went in. No coughing, none at all. I could breathe comfortably. I had much more energy. In fact, I felt pretty normal. Although yes, I also took the antibiotic series over the next ten days. I mention this acupuncture story to illustrate how just a small amount of metal, applied very carefully to certain channels of the body, can lead to immediate changes; — and I mean rapid and dramatic effects. This brings us back to what just happened with China, and two very important metals. [Exposed: Biden’s 2022 mistake to cost him election?]( [Click here to learn more]( Will this ugly scandal doom Biden in 2024? In February 2022, [Joe Biden made the most dangerous mistake]( any President has made in the past 150 years. If it all plays out like Jim Rickards is predicting… Biden’s blunder will soon cost good Americans EVERYTHING. There’s still time to protect your money. But you can’t wait. [>>See Biden’s terrible mistake here<<]( [Click Here To Learn More]( China Plays the Metals Card Have you heard of gallium? How about germanium? It’s okay if you’re not familiar with the names. They’re elements in the periodic table (see below) but not in everyday use like iron, copper, lead, aluminum, or such. Then again, iron, copper, lead, aluminum, and more comprise massive, near-trillion-dollar global markets with many suppliers and buyers. But the Chinese government sure has heard of gallium and germanium. The two metals are small in terms of global markets; in fact, we call them minor metals. The entire world trade in the two elements is under about $300 million per year for each. But the thing to know is that the two substances are critical to many modern technologies (again, see below), and the Chinese know it. So, here’s what just happened. At the beginning of July, Chinese authorities announced strict new export controls on gallium and germanium. And this does not reflect some humdrum trade dispute over how high the tariffs ought to be; no, it’s more of a geopolitical bombshell. Now, my acupuncture story comes into play. That is, just like how the doctor inserted very thin needles into critical nerve channels in my skin and skillfully redirected energy flows to help the healing process, China has highlighted a critical weakness in the West and is using these two metals to inflict pain. For example, despite its small primary market as a refined metal, gallium is essential to manufacture advanced computer chips, like those utilized in cutting-edge radar systems, solar panels, light-emitting diodes (LEDs), and more. And with germanium, again, despite its small primary market, the metal is also used in high-tech systems like integrated circuits, other cutting-edge chips, fiber optic cable, and high-performance solar cells, which are used in space satellites, and more. The point is gallium and germanium are essential foundation metals for many high-tech applications. Absent these two elements, quite a bit of tech just doesn’t happen or, in the best case, fails to work nearly as well. For the Chinese, it’s about leverage. Yes, the two metals have small markets. But downstream, their multiple uses involve tens and even hundreds of billions of dollars in end products, including advanced military equipment. And most of those products are at the cutting edge of advanced tech. Absent gallium and germanium, it’s back to the 1970s or 60s, tech-wise. Clearly, people in high places in China understand chemistry and technology. With their new export restrictions, they know what they’re doing and are doing it very carefully, with evident deliberation. Undoubtedly, much of this kind of informed, focused thinking is going on at the highest levels of Chinese government and military thinking; you have to tip your hat to such a targeted Chinese response. Meanwhile, China's new export-control regime is likely just an opening shot toward the West. China is replying, tit-for-tat, to all manner of sanctions from the West, such as restricting sales of advanced computer chips, chip fabrication equipment, and much else. So the question arises, what gives China this kind of power over gallium and germanium? Well, begin with the industrial fact that China controls about 80% of global gallium output and about 60% of global germanium output. Right away, China is a key player, and hence Chinese restrictions are absolutely intended to constrict and disrupt global trade in the two items. Okay, but now comes the next question. Why and how does China exert such significant control over the output of these metals? Is producing gallium and germanium all that difficult? Actually, no… In fact, people have known how to separate these two metals for over 150 years. But since the 1980s or so, China has pursued national policies that emphasize and encourage their production. In this sense, it’s a political policy applied to geochemistry. Back to School for Chemistry Along these lines, let’s study some chemistry. As we described above, gallium and germanium are elements on the periodic table. Take a look on the next page, and find the Ga/Ge boxes (hint, they’re right next to each other): As you can see, gallium (Ga) is positioned underneath aluminum on the periodic table. This means that gallium has a similar electron structure to aluminum, but it’s a larger atom with more electrons because gallium has a heavier nucleus. If you understand the chemistry, it’s no surprise that most of the world’s gallium is produced as a byproduct of smelting bauxite, the main source of aluminum. Okay, hold that thought. [Periodic Table] And see how germanium (Ge) is positioned under silicon, and again this means that it has a similar, but larger electron structure due to a larger nucleus. And of interest, most of the world’s germanium is produced as a byproduct of smelting and refining zinc ores; you can see how close germanium is to zinc on the periodic table. Okay, so if you want gallium, you must have an aluminum industry that smelts bauxite ore. Once the bauxite is smelted and refined into aluminum, there’s no more residual gallium. In other words, you won’t get gallium by recycling beer cans. You must mine and smelt primary bauxite. If you want germanium, in most cases, it comes from smelting zinc ore. That is, germanium tends to associate with zinc in sulfide form, in a mineral called sphalerite. Again, once you refine the sphalerite, you have zinc. So even if you can recycle the zinc, you won’t get any germanium. This takes us back to primary mining and smelting. Where Is the Mining? The Smelting? The U.S. problem with many metals, let alone exotic metals like gallium and germanium, begins with the fact that the country hosts very little primary mining in general anymore. That is, much of the country’s old smelting and refining operations closed down long ago. It’s a lost industrial heritage. According to the Congressional Research Service, there is but one primary aluminum smelter currently operating in the U.S. And all of one primary zinc smelter is working, a relatively small facility in Tennessee. In general, smelting ore is energy intensive and comes with a long list of environmental issues. Plus, smelters require skilled labor, and the U.S. education system is not geared toward creating anything like that sort of workforce. All in all, the bottom line is that the U.S. is not a friendly jurisdiction in which to operate a smelter, let alone open new, primary smelting operations. With no significant aluminum or zinc smelting and primary metal processing, it’s no surprise that the U.S. lacks domestic sources for gallium and germanium — and many other critical metals and substances as well. Still, these make for a story for another time. Let’s Look Ahead Right now, the U.S. government has a modest germanium stockpile, but no gallium in the warehouses. No doubt, the government and affected industries will scramble to secure future supplies of gallium and germanium. The materials are out there in the world, and markets will reshape to fit the new industrial correlations. If you’re looking for a focused, if not single-play “gallium and germanium” idea, stop reading because there is none, at least not outside of China, and I don’t recommend buying Chinese shares. Still, several companies in the West are in the aluminum and zinc business, and they understand the upstream extraction and downstream processing for gallium and germanium. One large mining play with extensive primary aluminum operations, hence gallium output, is Rio Tinto Group (RIO). It’s a massive company, at about $100 billion market cap, and currently cash-rich, such that it spins out a dividend of 7%. Another large miner with extensive zinc output is Teck Resources Ltd. (TECK). Its market cap is over $20 billion, with a dividend under 1%. In fact, Teck runs a large zinc mining operation in northwest Alaska called Red Dog. The concentrated ore is exported to Japan and South Korea for processing, but Teck does keep track of the germanium. So there’s hope, right? Just because China wants to restrict exports of certain metals, it does not mean that the U.S. or West has lost the game. But it does mean that there’s a geopolitical game being played, and it’s serious. Looking ahead, this metals game requires that the U.S. government — certainly U.S. politicians — get smart about what really matters in the world because bad omens are more than apparent. Something is coming at us from over the horizon. Today, the issue is gallium and germanium. Tomorrow, next week, or next month, it could be something else. In fact, it almost certainly will be something else. And we should all be thinking about what comes next. Then again, that’s why you read Paradigm Press’ publications. That’s all for now… Thank you for reading. Best wishes… [Byron W. King] Byron W. King Contributing Editor, Rude Awakening In Case You Missed It… Russia: 📈 Germany: 📉 [Sean Ring] SEAN RING Good morning Reader, Happy Thursday! Boy, oh boy. This wasn’t supposed to happen. Russia was supposed to be suffering. The West was supposed to be prospering. Someone at the Office of Unintended Consequences didn’t inform Biden, Blinken, and Nuland that their strategy was asinine. And ace vassal state Germany just let them do it. Now, we’ve got tangible evidence sanctions were a strategic failure. By the end of 2022, Russia’s economy surpassed Germany’s as the largest economy in Europe. They’ve kept the news quiet. You probably didn’t hear about it. But we’ve got proof. From the World Bank, no less: Credit: [The World Bank]( To be fair, Russia’s economy is nearly half the size of Germany’s without adjusting GDP by PPP. But that’s not what most economists look at. They adjust. Let’s examine what those numbers mean, what PPP is, and why it matters. But before that, I just had a horrible flashback… Bodrum, Turkey, September 2015 I’ll never forget it as long as I live. It was boat day at Hans Hoppe‘s libertarian shindig in Bodrum. On the Sunday before the conference concludes, we go out on boats into the Mediterranean. It’s usually mid-September with gorgeous weather and cool water. My ship, colloquially known as the Bad Boys, is always stocked full of booze from around the world. It’s a great day, full of mischievous behavior and uproarious laughter. This particular year Captain America, as we call him, decided to have some fun with our friend, who we’ll call Mad King Lud. Lud is very well endowed. Lud was getting out of the water, climbing up a ladder on the side of the boat, and Captain America was right behind them. Captain America, who still serves in the US military and is one of the brightest guys I know, maintains a 15-year-old’s sense of humor. He decided to “pants” Mad King Lud. Luckily, I was nowhere near the ladder. However, I had an unobstructed view from the deck. I’ll never forget what I saw: Lud‘s pendulous tallywhacker, swinging as if it was one of the Kraken‘s tentacles, nearly knocked out Captain America’s teeth! The good Captain was hanging onto the ladder for dear life, bobbing and weaving the ginormous dong. Pam was facing me and had her back to the infamous incident. I hugged her as hard as possible so she couldn’t turn around to see what she was missing. I had gotten in the wrong queue when God handed out skinflutes. I had finally understood what it was to be a flat-chested junior high school girl whose best friend suddenly sprouted double Ds. It was humiliating. Right now, I suspect Germany feels the same way. [Warning: Will “Bidenflation” Destroy Your Retirement?]( [Click here to learn more]( If you’re like most Americans, you’ve worked hard for decades to build your financial legacy. And now, as a result of Biden’s disastrous money printing policies, that’s all at risk. According to one top retirement expert, “Bidenflation” threatens to destroy your retirement and make your hard-earned savings worthless. That’s why you must take action right away to protect yourself… [Click here now to get the simple, step-by-step actions to survive “Bidenflation.”]( [Click Here To Learn More]( Time To Steel-Man: PPP is Flawed Peter Thiel uses the term “steel-manning” to describe how you should argue against your opponent’s best arguments to win an argument, rather than his weakest. (It’s supposed to be the opposite of “straw-manning.”) I would guess that most people would say purchasing power parity (PPP) is highly flawed. [Mish Shedlock just published a post]( calling PPP “horrendously flawed.” I encourage you to read it, as it compares the US and Chinese economies. After reading it, you’ll have more data to decide your thoughts on PPP. So what is PPP? In plain English, every country has a different currency, inflation rates, interest rates, and prices. Purchasing power parity (PPP) tries to correct for this to make better comparisons between countries. A more formal definition of PPP: an economic theory and a method used to compare the relative value of currencies in terms of their purchasing power. The concept is based on the idea that without transportation costs and other trade barriers, identical goods should have the same price when expressed in a common currency. In other words, the exchange rate between two currencies should adjust to equalize the prices of a basket of goods and services in both countries. The theory suggests that over the long term, exchange rates between two currencies should adjust to reflect differences in inflation rates between the two countries. Suppose one country has a higher inflation rate than another. In that case, its currency should depreciate relative to the other country's currency, so the prices of goods and services become more balanced. There are two main forms of PPP: - Absolute PPP: This theory states that the exchange rate between two currencies will be in equilibrium when the purchasing power of each currency is the same for a common basket of goods. In other words, the exchange rate should reflect the relative price levels of the two countries. - Relative PPP: This theory considers changes in the inflation rates between two countries. It suggests that the change in exchange rates over time should reflect the difference in inflation rates between those countries. The purported advantages of using PPP to “equalize” the comparison of economies are: Comparing countries' Gross Domestic Product (GDP) using Purchasing Power Parity (PPP) has several purposes and advantages. But I’ll highlight the top five. - Accurate Comparison of Economic Size: GDP is a commonly used measure to assess the size of an economy. However, when comparing the GDPs of different countries using nominal exchange rates, the comparison is distorted by fluctuations in exchange rates. PPP-adjusted GDP allegedly provides a more accurate measure of the relative economic size by accounting for differences in price levels and currency values. - Global Economic Rankings: Using PPP-adjusted GDP allows for a different ranking of countries' economic sizes compared to nominal GDP rankings. Some countries with relatively low nominal GDP but lower price levels can have higher PPP-adjusted GDPs, reflecting their larger economic capacity when considering local price differences. - Cross-Country Economic Analysis: PPP-adjusted GDP facilitates cross-country economic analysis by providing a more consistent and comparable measure. Researchers, policymakers, and analysts use PPP-adjusted data to study economic trends, growth rates, and economic development across countries. - Trade and Investment Decision-making: Businesses and investors use PPP-adjusted GDP data to make informed international trade and investment decisions. It helps them understand the potential market size and consumer purchasing power in different countries. - Allocation of Resources: International organizations and aid agencies use PPP-adjusted GDP data to allocate resources and assist countries based on their economic capacity and needs. So, it’s not an altogether useless metric. You just need to know its limitations. And there are loads of them: - Quality and Availability of Data - Assumptions and Methodology - Non-Tradable Goods and Services - Subsidies and Taxes - Exchange Rate Volatility - Quality of Life and Non-Market Activities - Urban-Rural Disparities - Homogeneity Assumption - Dynamic Changes - Data Collection Challenges While PPP is indeed a flawed metric, it’s the best thing we’ve got for now. Sanctions: The Vassal Suffers According to [Politico]( Confronted by a toxic cocktail of high energy costs, worker shortages, and reams of red tape, many of Germany’s biggest companies — from giants like Volkswagen and Siemens to a host of lesser-known, smaller ones — are experiencing a rude awakening and scrambling for greener pastures in North America and Asia. Not only that, but foreigners aren’t interested in the high costs of Germany if they can find comparable expertise in cheaper places: [chart] Credit: [Politico]( Germany is now drawing comparisons to America’s Rust Belt and the UK’s Midlands. They were once thriving industrial hubs that fell because of mismanagement. Unfortunately, Germany doesn’t have a diverse economy. Its banking sector is a mess, and manufacturing counts for 27% of its economy. (The US is 11% by comparison.) Like the rest of Europe, Germany's demographics work against it. That’s why its reliance on cheap Russian energy wasn’t to be underestimated. Alas, the USG didn’t give a toss, and the German elites stupidly went along with the poor policy. Now the country, and perhaps the entirety of the EU, will pay for the mistake. Wrap Up Meanwhile, Russia is whistling Dixie, or whatever their equivalent is. Somehow, despite the barrage of sanctions, blackballing at international institutions, and seizure of its assets abroad, Russia emerges the winner. Now, by one measure, it’s Europe’s biggest economy. All the best, [Sean Ring] Sean Ring Contributing Editor, The Morning Reckoning feedback@dailyreckoning.com Twitter: [@seaniechaos]( [Paradigm]( ☰ ⊗ [ARCHIVE]( [ABOUT]( [Contact Us]( © 2023 Paradigm Press, LLC. 808 Saint Paul Street, Baltimore MD 21202. By submitting your email address, you consent to Paradigm Press, LLC. delivering daily email issues and advertisements. To end your Rude Awakening e-mail subscription and associated external offers sent from Rude Awakening, feel free to [click here.]( Please note: the mailbox associated with this email address is not monitored, so do not reply to this message. We welcome comments or suggestions at feedback@rudeawakening.info. This address is for feedback only. 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