Uranium
September 24, 2004

While we wait until after the elections for the gold price to rally, two other metals warrant a look.

I wrote about silver last month, noting that the silver price is much more volatile than the gold price and so astute speculators should be able to make a mint trading it.

A rally in the gold price usually brings buyers into the silver market as well, and because the silver market (in dollar terms) is so small, even a modest amount of speculative buying can significantly drive up the silver price.

It happened recently when the silver price rose from $4.50 to $7.50 an ounce, only to collapse again to $5.50 earlier this year. But that’s the nature of the silver market. If you’re comfortable with volatility, and you remember to sell when the price runs up, the silver market should treat you well.

The other metal you should be paying attention to is uranium.

Annual uranium demand for power generation is about 170 million pounds. The big expense in a nuclear power plant is the capital cost to actually build the plant. Because the price of uranium accounts for a small portion of the cost of generating electricity, the utilities can not afford to run out of fuel: they have to keep operating. So they are likely to start hoarding uranium at the first sign of a potential supply shortage -- it won’t be the first time.

The uranium price peaked in 1979 at more than $43 a pound on fears of production shortages and increasing commodity prices. Since then nuclear power generating facilities have been hoarding uranium to protect themselves from price volatility and supply disruptions. However, the supply disruptions never materialized and the price of the metal declined to less than $8 a pound by 1992.

By 1996 the uranium price had recovered to $16.50 a pound. Then the combination of excess inventory held by utilities (that reduced the demand for uranium), additional supply coming from the dismantling of Russian warheads and the strength in the dollar caused the uranium price to decline from $16.50 to only $7.10 a pound in 2000.

Uranium is currently trading for $19.65 a pound -- a significant increase from where it was only four years ago, but it could still go higher.

Primary uranium supply from mining is only 75 million pounds a year, compared to the 170 million pounds of annual demand. The balance comes from secondary supply such as the drawdown of excess inventory still left over from the Seventies, dismantling of Russian nuclear warheads, re-enrichment of spent reactor fuels and, more recently, the enrichment of uranium tailings.

Most of the secondary supply, with the exception of weapons-grade uranium being procured from Russia, is not expected to last for much longer than a few more years.

Cameco, the world’s largest uranium producer, has been talking about a production shortfall for years. And for years the imbalance between primary supply and annual demand seemed benign. The most recent rise in the uranium price, however, might be an indication that the days of cheap uranium are over. That opens the possibility of another Seventies-style uranium price-shock, when the price increased almost seven-fold in less than ten years.

Paul van Eeden

Paul van Eeden works primarily to find investments for his own portfolio and shares his investment ideas with subscribers to his weekly investment publication. For more information please visit his website (www.paulvaneeden.com) or contact his publisher at (800) 528-0559 or (602) 252-4477.

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