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Uranium Correction Provides Buying Opportunity

By Jay Taylor
Aug 17 2007 9:41AM

Uranium has had its first significant correction in several years. The price of U3O8 has fallen to $110, after briefly reaching a weekly closing high of $136. With this kind of decline, our uranium stocks have taken an even bigger hit in percentage terms which we think is really good news for those of you who have not yet purchased a portfolio of uranium stocks. In fact, we think James Dines is on to something when he suggests that a decline in the price of uranium reduces the potential dishoarding of more uranium from government stockpiles and as such is bullish for the uranium stocks.

We also agree with Dines in his view that uranium is uniquely poised at this particular time to weather a recession better than any other metal except for gold. Gold is real time-tested, market-proven money with intrinsic value, while paper money has been forced on the subjects of the American “crown.” Therefore, gold has been declared money by the markets, not by fiat or edict. When financial systems melt down or melt up, gold will be demanded as a medium of exchange once again by market participants, whether we head into a hyperinflation or an excruciating deflationary debt implosion. This is what separates gold from other metals, and even silver, in a deflationary collapse. Because of its nature, gold is money, while other metals are not, though silver is arguably also money, but not as good as gold.

If uranium is not money, why do I expect it to hold up well if we run into a deflationary scenario over the next few years? Because I have talked about this at some length in the past, I’m not going to write too much more about it now except to say that there is a shortage of uranium in the world to meet the needs of the existing 440+ nuclear reactors operating around the world right now. These reactors supply a significant amount of the world’s electricity. There are no substitute fuels for these power plants, so that the price of uranium can rise very dramatically - even much higher than the $136 that U3O8 hit earlier this year. In other words, this metal is price inelastic. There are no meaningful new supplies of this metal coming into the market for another 5 to 10 years. If we go into a major depression, there would be a reduction in demand for electricity, that is for sure, but a basic amount of electricity would still be required to hold society together. So the existing power plants would still need to secure uranium to stay in business, and there simply isn’t enough of it around to meet even a reduction in demand for electricity. Thus, even if we enter into a significant recession/depression, demand for uranium should keep its price in the $80 to $120 range for the foreseeable future.

One more detail I would like to point out is that with the most recent decline in U3O8, its “real” (inflation adjusted) price is now back to its prior peak of around $111.69 in 1976. With this “real” price of uranium at these heights, we think as long as U3O8 is priced in the $80 to $120 range (in real terms), the economics for uranium mining companies should remain very robust. While the market for commodities these days can be very fickle, the pullback from this sector by the investment community (perhaps most significantly hedge funds at this time of credit strains) provides alert investors with an opportunity to increase their exposure to this sector.

So, we see the most recent decline in the price of uranium and in the shares as a golden opportunity for investors to acquire uranium shares for their portfolio.