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
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
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