The Fall of "Silicon" Valley: Investing in Technology Metals

If you subscribe to the Tech Investing Daily newsletter or simply peruse our blog posts now and again, you know we don’t talk about metals too often.

Our overarching strategy for making winning trades is to play emerging trends and disruptive technologies, and, quite frankly, materials generally don’t fit the bill.

Now, I’m not going to pretend to be a commodities expert — to be honest, I’m far from it…

But it doesn’t take a genius to realize that investing in (traditional) metals has gone the way of the dodo bird in recent years. You just need to take one look at the three-year price movement of gold, silver, copper, and platinum to realize this is where your money goes to die:

Now, we all know there are silver and gold bugs out there who will incessantly tell you to buy whatever metal it is they’re touting. It doesn’t matter what’s happening in the market — it’s always a good idea to buy.

No faith in the dollar? Buy gold, because we’ll revert back to it as a form of currency! (We won’t.)

Oh, your gold investment is going nowhere? Well, hang on, because it’s going to rebound eventually!

You lost all your money investing in gold? No biggie, just buy silver! Look, it’s at a bottom! It can’t possibly go any lower! Discount pricing, guys! Yay!

But lower and lower it goes. Or at the very best, nowhere it goes.

If you’ve fell for this sort of rhetoric in the past, I feel for you… I really do.

But realize if you’re going to make money in the market, it’s never going happen by listening to any of the perma-bulls or perma-bears who refuse to adapt their positions to what’s happening in the outside world.

Believe me — I too worry about the economy, and I too think it was a mistake to abandon the gold standard…

But leave the gold standard we did, and anyone who thinks we’re going back is, quite frankly, a dinosaur among investors.

Goldageddon!?

To be clear, I’m not trying to tell you gold, silver, or copper will never go back up (they will). Nor am I telling you it’s impossible to make money trading these commodities. However, none of these metals will ever (at least, it’s highly unlikely) offer reliable growth to your portfolio.

Commodities are cyclical in nature, which means victories will eventually be claimed on both sides. But we all know what they say about broken clocks being right twice a day…

The cold, hard truth is that your success investing in (most) metals is largely going to be determined by the figurative flip of a coin.

Now, the reason I say “most” is because every now and then, demand for a strategic metal or mineral increases enough that it’s worth taking notice. This generally happens when a new technology requires the use of a specific material.

Take the metalloid silicon, for example…

Prior to the invention of the computer in the mid-20th century, silicon held very little use in society. By 2010, though, the material was absolutely crucial to the $300 billion semiconductor industry.

The sudden demand for silicon brought on by computers and mobile devices sparked a wave of profits upon investors in the know. Despite being the second-most abundant material in the world, silicon created a unique investment opportunity, as refineries were needed to create refined and pure silicon.

Silicon refiner SunEdison (NYSE: SUNE) (previously MEMC Electronic Materials), for example, saw gains as high as 4,557% in the wake of the computer revolution:

Of course, the financial crisis of 2008 eventually took a chunk out of those gains, but only for those who continued to hold on.

Frankly, you’d have to be pretty crazy to not have taken those profits off the table. After all, a simple $10,000 investment in 2001 would have had you up well over $450,000 in just six years.

Granted, these kinds of opportunities are few and far between, but that doesn’t mean it’s something you should ignore. If you can pinpoint just one breakout metal or mineral before the rest of the market jumps in, you could very well be looking at similar quadruple-digit gains over the course of just a few years.

The reason I bring all this up is that today, we’re on the cusp of a new revolution in tech metals and minerals — one that will be marked primarily by the end of silicon’s dominance in the electronics industry.

The Death of “Silicon” Valley

People have been talking about transitioning to alternate metals for quite some time, but recently these talks have actually begun coming to fruition.

Intel — the largest semiconductor manufacturer in the world — has officially announced its plan to move beyond silicon-based chips.

Specifically, Intel will be abandoning silicon at 7 nanometers. At the 2015 International Solid-State Circuits Conference (ISSCC), the company stated that “new materials” will be required to continue reducing the size of its computer chips…

Likewise, IBM recently announced $3 billion in funding for chip research in mid-2014 — not only in an effort to miniaturize chips to 7 nanometers, but also to replace silicon with alternative materials.

From the words of IBM VP Bernie Meyerson: “Silicon Dioxide, which has been used for the last 30 years, can no longer be used as the insulator.”

Or as Tom Conte of Georgia Tech has stated: “Silicon’s days are numbered. We’ve hit a place where we need to step back and rethink how we design computers.”

The reason for this material shift is quite technical, but the gist is that as chips have gotten smaller, silicon has continued to burn hotter and use a lot more power (with circuits so tightly packed, energy dissipation becomes a major concern).

Further, at a small enough chip size, silicon actually goes quantum-mechanical. In short, the material eventually stops behaving like a transistor, and the benefits of silicon hit a wall.

Moving forward, chipmakers will need to begin relying on alternative materials, though at the moment, there’s little certainty as to what those materials will be…

The most promising candidates right now include gallium, hafnium, indium, carbon nanotubes (CNTs), graphene, and eventually qubits in the form of single atoms, ions, photons, or electrons.

Any of these paradigm shifts will likely come hand in hand with fresh investment opportunities, and while we can’t tell just yet which metal (or metals) will replace silicon, it’s safe to say the best opportunities in the market will not come from gold or silver but rather from the specialty “tech metals” and rare earths.

Until next time,

Jason Stutman

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