Is rare earth metals mania another bubble that is about to pop, or a genuine shift in the supply demand curve?

That question is the crux of a heated debate this week after Goldman Sachs analyst Malcolm Southwood said the back-story on rare earths, which have rocketed to more than ten times their value in just a couple years, is about to change dramatically. Southwood says the supply deficit of rare earth metals will peak at 13.2%, or just over 141 thousand tonnes this year, but will actually reach a surplus of 3.2% as soon as 2013.

Demand for rare earth metals has risen, in part, because they are used in a variety of technologies that didn’t exist when the price of the metals was depressed, which was much of the latter half of the last century. Rare earths are used in iPods, GPS navigation systems and plasma televisions.

Economically, the importance of rare earths became a source of razor sharp public focus when China began to restrict their export. In July 2010, that country announced a 72% year over year reduction in exports. China’s hold over the rare earths -the country still controls more than 95% of the market- meant a flurry of activity in looking for new sources worldwide.

In Canada, rare earths stocks joined the global party. Canadian investors, like their counterparts worldwide, clearly see political motivation behind the lessening of China’s stranglehold on rare earth supply as a long term booster.

Toronto’s Avalon Rare Metals (TSX:AVL) has five Canadian rare earths projects underway. Encouraging results from their flagship project, the Nechalacho Rare Earth Element Project located at Thor Lake in Northwest Territories, has helped shares of the company rise from a low of $.38 cents on December 24, 2008 to a recent high of of over $9 in mid-April.

Ucore Rare Metals (TSXV:UCU), which changed its name from Ucore Uranium last summer has seen a lot more success since the name change. Drilling on the company’s Bokan-Dotson Ridge rare earth project in southeast Alaska showed what management said was “an unusually high skew in the Dotson zone toward heavy rare earths”. Ucore’s rise, although not on the scale of Avalon, was perhaps more dramatic, Ucore bottomed at just three cents in late 2008 before hitting a high of $1.10 in early March of this year.

And Great Western Minerals Group (TSXV:GWG), is a Saskatchewan based company that says its goal is to be one of the first vertically integrated rare earth producers outside China. Great Western has built up a portfolio of rare earth properties in Canada, the US and South Africa. The Steenkampskraal mine, which is located 350 km north of Cape Town, was originally operated through a subsidiary company of Anglo American Corporation from 1952 to 1963, and during that time was actually the world’s largest producer of thorium. Shares of Great Western hit a high of $1.06 on February 4th of this year, and could be had for just three cents in late 2008.

So are Canadian rare earths stocks about to come crashing back to earth? Not so fast says rare metals expert Jack Lifton of Technology Metals Research. Lifton says the Goldman Sachs report is “nonsense” because, he says, bringing rare production online is a much more complicated process than the report suggests.

Lifton doesn’t believe that “….world demand for high-purity rare-earth metals and alloys, for use outside of China, will be met by non-Chinese production by 2013” he says “because until there is a high rate of production of commercially pure separated rare-earth chemical compounds, there will simply not be enough feedstock to gamble on continuous large-scale production of these high-tech materials, by those who have never before done such high volume processing of such complex materials.”

Those investors who agree with Lifton’s take on rare earths have had the opportunity for some bargain hunting of late. Shares of Avalon Rare Metals lost more than 7% on Wednesday to close at $7.29. Great Western Minerals was also down just over 7% to $0.77. And Ucore Rare Metals gave back 5%, to close at $.74 cents.