Regulators are bracing for the "almost certain development of rare earth derivatives markets," Summer Mersinger, a commissioner on the US Commodities Futures Trading Commission, said at a special meeting of the CFTC's Energy and Environmental Markets Advisory Committee in Colorado on Feb. 13.

Metal derivative markets are investment vehicles based on an underlying commodity's value, allowing investors to speculate on metal prices. Rare earths are a group of chemical elements considered crucial to various modern technologies including smartphones, electric vehicles, wind turbines and medical equipment, and production is expected to see substantial growth in the coming year. US officials and businesses are trying to catch up with China, which dominates the mining and processing of rare earth metals.

With rare earth exploration increasing, Mersinger expects a derivatives market to follow. In her remarks, Mersinger said gold derivatives were traded on the New York Stock Exchange only 13 years after the California Gold Rush of 1849, and it is only a matter of time before rare earth derivative markets emerge.

"From this, we can conclude that the iron, or perhaps we should say — golden — rule of commodity derivatives market creation is that when critical commodities are found in abundance, spot commodity markets develop quickly and derivatives markets may, if the conditions are right, follow thereafter," Mersinger said. "As commodity derivatives regulators, we must always be prepared for new commodity derivatives markets, particularly ones which will significantly impact our economy. Today, we are in the midst of a 'gold rush' for rare earths."

The CFTC's Energy and Environmental Markets Advisory Committee is charged with considering how the CFTC should prepare for those new markets. The committee was established by the Dodd-Frank Wall Street Reform and Consumer Protection Act to advise CFTC commissioners.

There are currently no rare earth minerals derivatives contracts listed in the US, Commissioner Christy Goldsmith Romero said at the committee meeting.

Investors have been showing some interest in rare earth materials lately. VanEck, a US investment firm, already offers an exchange-traded fund based on the equities of companies producing, refining and recycling rare earths and other strategic metals and minerals. The global rare earth metals market was estimated at $5.9 billion in 2022 and is expected to see a double-digit compound annual growth rate between 2023 and 2030, according to a December 2023 report from GMI Research, a research and consulting firm.

The Biden administration highlighted the United States' reliance on critical minerals and materials in a June 2021 review of the country's supply chains and domestic manufacturing. In that report, the White House pointed out that China controlled 55% of global rare earth mining capacity and 85% of rare earths refining in 2020. The report also called for the US to secure reliable and sustainable supplies of critical minerals and metals.

However, it will likely take time to build a domestic supply chain for rare earth elements. Tom Schneberger, CEO of rare earths explorer and processor USA Rare Earth LLC, told S&P Global Commodity Insights in 2023 that a rare earths supply chain outside of China is decades away.

The market for rare earth metals is also relatively small and can be volatile.

"There's an asymmetry of information," Romero said in her opening statements. "If rare earth minerals derivatives markets do launch to meet demand, the CFTC should monitor those markets to ensure that they are fair and competitive and that prices are set by market fundamentals, not excessive market power or manipulative trading."

A lot of the markets for rare earths and other critical minerals are "extremely small," Ian Lange, chair of the Role of Metals Markets in Transitional Energy Subcommittee, said during the meeting. Many of the individual metals are under the radar of most investors and would have a market of under $1 billion, added Lange, who is also an associate professor at the Colorado School of Mines.

"It won't take much capital to move these things forward, but with such a small market, I think generally, it leads to kind of information being hard to come by, things being relatively opaque with few players in the game," Lange said.