Hotelling principle

Have you heard about Hotelling principle, which is declared by a economist at Columbia University, if you take the rare earth materials fluctuation during US-China trade war, you will see how incredible the idea is.

Traders based on magnet industry expect the price of rare earth raw materials which is a nonrenewable precious natural resources to rise at a rate equal to the current interest rate.

Let us see why it is correct, you’ve seen that the interest rate is the opportunity cost of holding a rare earth magnet or materials inventory due to political reasons since trade war begun. If the price of rare earth is expected to increase at a rate that exceeds the interest rate, it is profitable to hold a bigger inventory, same situation happened at 2011 in China. Demand increases, supply decreases, and the price rises.

On the contrary, if the interest rate exceeds the rate at which the price of rare earth is expected to rise, it loses profits, and the the price falls, like the recent situation.

But if the price of rare earth is expected to rise at a rate equal to the interest rate, holding an inventory of rare earth is just as good as holding bonds. Demand and supply do not change, so does the price of rare earth itself. Only when the price  is expected to rise at a rate equal to the interest rate is the price at its equilibrium, traders and buyers will conduct the business activities once everything is stable here