Rare earth metals: the scam that's got the FSA worried

This week the financial regulator felt compelled to issue a public warning about rare earth metal scams. Here's why it's becoming the favourite scam for crooks and conmen.

The Financial Services Authority posted a warning on rare earth metals (also known as rare earth elements) earlier this week. So it's worth revisiting this scam, particularly as I have just been offered a six kilo package of rare earth elements in a so-called 'green energy bundle' for £6,744.

This seller told me I would get a kilo each of Yddrium and Dysprosium and two kilos each of Lanthium and Neodymium. I don't know what I would do with them (or what they are for), but I was assured they would be stored in a bonded warehouse near Gatwick controlled by HM Customs & Excise, part of HMRC.

Now I have no doubt there are bonded warehouses near airports, but all they do is act as storage until UK duties and taxes are paid when the goods can be released. Bonded warehousing is no guarantee of value.

An FSA-approved metallurgist?!

Even more fancifully, the salesperson assured me that these were not just any old lumps of metal – other firms sell low-grade metal ore – but they were high quality, with the assurance they had been checked out by an FSA-approved metallurgist. “An FSA company checks all metals,” I was informed.

That is news to me – and more importantly to the FSA, which has nothing whatsoever to do with metals or with anyone offering to verify the purity of a lump of unprocessed metal ore. My asking the FSA whether it regulated metallurgists was probably the most obscure question posed to the watchdog for many a year, and may have played a part in the FSA publishing its warning.

The scammer assured me that my six kilo package would be insured with Lloyd's of London. Even if this was true (and it is unlikely) the policy would cost peanuts. Criminals are hardly lining up to raid lumps of ore from secure warehouses. They are either bright enough to realise the metals are an overpriced swindle or they are out selling the stuff themselves to vulnerable investors.

On top of that conversation I was targeted with three phone calls from other unauthorised sales outfits and several emails which lead to yet more dodgy sales peoples.

It is a veritable epidemic as dishonest salespeople try to scoop up cash as fast as possible before they are rumbled. As I wrote last week, rare earths have replaced carbon credits as the scam of choice, and many of the salespeople currently peddling them can trace a career back to landbanking and, before that, wine and whisky.

A grain of truth

The rare earths scam story depends on some basic supply and demand factors. And as usual, there is a grain of truth, but not much more, in what they say. So we have a quote from Barack Obama where he apparently said: “The U.S.'s energy future depends on rare earth elements". Yes, until someone comes up with a better idea, then the elements are needed.

But that is not a reason to invest in a market which has no visible price markers, unlike gold or silver, and where the metals are dealt on private markets rather than public exchanges. I have literally no idea of the real resale value of the six kilo pack I was offered. And it means I cannot check statements such as “the price of rare elements has jumped on average 200% over the last few years, outperforming all other investments” where just about every word is either vague or untrue.

I was also told that these are “the most crucial elements for human evolution since steel and oil”. Maybe, but steel and oil have never turned in the quick gains scammers promise.

And what about “the Chinese and North Korean governments are already holding secret talks to exploit Korea's $6 trillion rare earth elements supply and monopolise the world's supply”?

North Korea is a new one – added in to give a feeling of conspiracy. But a recent article in the august Financial Times provides useful background to the reality, rather than the fanciful stories the sellers peddle. This relates how China is trying to increase production to boost its own manufacturing sector and increase world demand for the consumer goods on which its factories depend. And the article makes it clear that others are moving in on processing the metals, which are not rare at all but difficult to extract without pollution.

This is hardly surprising in metals – as prices rise, new producers come on stream. Non-Chinese production could rise tenfold between now and 2015.

No viable market

The FSA says in its warning: “We are yet to see any convincing evidence that there is a viable market for retail investors to make money from investments in rare earth metals. Companies that use the metals almost always buy in very large quantities, making it highly unlikely they will deal with small independent retail consumers.”

That does not sound hopeful for whoever bought those six kilos that I turned down – assuming they ever existed.

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