Lithium: A Study in Some Old Fashioned Commodity Speculation

The recent rise in the price of gold and the possible bottoming out of industrial commodity prices has some brave investors flocking back into mining stocks. While the gold rally looks like it is primarily based on sentiment, the move in the price of lithium over the past year exhibits a more classic example of what drives the cyclical nature of mining stocks perceived supply and demand.

Lithium is the primary component of the lithium ion batteries. You have a lithium ion battery in your cell phone as well as in countless other personal electronic devices. Currently, the billion dollar question revolves around the future demand for the considerably larger lithium ion batteries that are used in electric cars.

The article includes price targets for lithium going out into the future. Ignore them. In these scenarios, prices rarely move in an organized, linear fashion. The lithium market is also quite small and, thus, by definition, most likely prone to countless inefficiencies, and, most importantly, subject to manipulation.

Fundamentally, money is made in commodity stocks when everybody wants the underlying commodity, and very few can supply it. Higher prices for the underlying commodity can make stock prices go parabolic; lower underlying prices send them crashing back down to earth. Boom, bust.

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For the sake of contrast, here is a chart that didn’t make it into the article. This is the Global X Lithium ETF which holds a basket of ‘lithium themed’ stocks:

LIT BigCharts