How do rare earth prices respond to economic and geopolitical factors?

This paper investigates the correlation between rare earth prices, geopolitical risk and global economic activity. The wavelet decomposition technique is used to capture the variables' dynamic correlations in the time and frequency domains. The empirical results show that rare earth price leads the geopolitical risk index positively when rare earth markets encounter supply shocks. However, the lead-lag relationship was reversed after the global pandemic in 2020, suggesting that these two variables may enjoy a mutual relationship in the short run. When geopolitical risk is high, it positively affects the rare earth price, highlighting the strategic and hedging value of rare earth during periods of turmoil caused by geopolitical events. In addition, the wavelet results show that the price of rare earth rises when economic activity is flourishing and decreases when the economy is gloomy. Conversely, the increase in rare earth prices does not inhibit global economic activities due to its broad application prospects in the energy transition. Therefore, policy-makers should establish risk early warning mechanisms to ensure the stable price of rare earth to prevent the adverse impact of geopolitical risks on rare earth security and economic activities.