Justin’s note: Yesterday, legendary resource investors Doug Casey and Rick Rule explained why the uranium market is a contrarian investor’s dream right now. Today, in part 2 of their discussion with Crisis Investing chief analyst Nick Giambruno, the guys share more on this big opportunity…
Nick Giambruno: Doug, why is uranium so volatile, and of course, how do we take advantage of that?
Doug Casey: Well to start with, it’s perhaps the most political of all commodities, even more than gold. It’s a very emotional thing. Since nuclear power is a highly regulated industry, it depends on what these governments do. After Fukushima, the Japanese practically closed down their entire nuclear industry. The Germans—idiotically quite frankly—are trying to go to solar, which makes no sense in northern Europe where the skies are often cloudy.
Then you have the “Greens” that hate nuclear, when in fact they ought to love nuclear. Because it’s by far the safest and the cleanest form of mass-power generation. So it’s an emotional and political thing. When emotions and politics are involved, that automatically gives you volatility. Volatility is actually a good thing because if your psychology is level enough, you can profit from it.
I’d also point out that volatility and risk are two different things, which are often confused. Not to say that uranium isn’t risky because of all these political problems around it, but I think it’s a distinction that’s got to be made and observed.
Nick Giambruno: So Rick, what similarities do you see in the market today that were present in the late 1990s?
Rick Rule: Well it’s actually eerily similar. Today, the total cost of producing a pound of uranium is between $55 and $60. So the industry makes the stuff for let’s say $50, to make the math simple, and they sell it for $25. They lose $25 a pound and do it 100 million times a year.
So we’re back to the same conundrum that we were at in the late 1990s. Either the price of uranium goes up or the lights go out. Despite the fact that we don’t like uranium, uranium is about 15% of US baseload power, and it’s about 65% of non-carbon-generating US baseload.
In Germany, which Doug referred to, although they’ve shut down their nuclear power plants, they’ve attempted to replace it with solar, which is kind of funny because the sun doesn’t shine there. In fact, they’re running the country on brown dirty coal and ironically imported uranium electricity from Poland and France.
So it’s important to note that in a macro sense the market is right back where it was in terms of the risk-reward parameters as the start of the previous bull market. The price of uranium has to go up, but we don’t know when.
We have also experienced a dramatic thinning of the number of uranium companies from a high of 500 down to around 25, which I think is interesting.
What’s changed, has changed for the better. That is in the speculator’s memory—at least the rich speculator’s memory—the last bull market in uranium is still strong.
The greed associated with a package of stocks where the worst of them went up 20-fold is strong, I think, among older speculators like Doug and me. That when the uranium move gets going this time, the response will be, pardon the pun, even more explosive in its early stages than it was the last time.
The last time, there hadn’t been a uranium bull market in probably 20 years, and the speculative landscape had changed to the extent that most of the people who had participated in the bull market in uranium in the 1960s and early 1970s no longer cared by 2001 or 2002. In the circumstance that we’re in in 2018, there are probably billions of speculative dollars controlled by people who participated either directly or vicariously in the last bull market, and I guarantee their memories are still fresh.
Nick Giambruno: Doug, when we were in Vancouver, you mentioned that uranium is your top pick right now. What makes uranium, and not some other commodity or speculation, more compelling at this moment?
Doug Casey: First of all, I have to say that all commodities are cheap right now relative to their historical prices, relative to their production costs. I’m talking about all commodities. So that whole category interests me.
Meanwhile, stocks are in a bubble. Bonds are in a hyper-bubble. Most real estate is in a bubble. You have to go where things are cheap. And of all the commodities, uranium is the cheapest both relative to the cost of production and relative to historical highs and lows. So that’s why it came down to uranium. It’s simple logic as far as I’m concerned.
Nick Giambruno: Rick, what do you think will turn the uranium market around? Is it going to primarily be supply destruction or demand creation?
Rick Rule: You asked the question exactly correctly, so thank you. Demand creation is taking place as we speak. New reactor construction worldwide is taking place at an absolute record pace. And it’s important to note that the new reactors that are being constructed consume a lot more uranium and produce a lot more power than the old ones that they’re replacing.
Supply destruction is also taking place as we speak. Both of those circumstances are occurring simultaneously.
The critical question is really the pace of Japanese restarts of their reactors. It’s important to note that Japan has had a policy of energy security since the Arab oil embargo in the early 1970s. And the only substance that you can store sufficiently to power an industrial economy like Japan is uranium. You can’t store enough coal. You can’t even store enough liquefied natural gas.
So from the political perspective of Japan, nuclear is an important part of their energy future. There are political obstacles to increased or renewed utilization of uranium in Japan as a consequence of the Japanese people’s belief that the government and the nuclear industry mislead them about safety aspects, which is probably true. I’m not an expert on Japanese politics.
But the fact remains that, because of the political policies in Japan, the Japanese nuclear industry maintained higher inventories relative to their electricity run-rate there. And when the Japanese shut down their nuclear fleet, what had been inventory became supply. The overhang that we’ve seen in the market in the last three years in particular has been very much a function of the fact that Japanese inventories became regarded in the market as supply.
As you restart the Japanese nuclear fleet, first of all, you burn more and more uranium. In other words, you consume more; demand goes up. But probably more importantly, the inventory on the market, which the market now sees as supply, goes back to being inventory. So very quickly you sterilize, from the market’s perspective, the overhang.
So I would suggest to you that the key determinant, in terms of when economic pricing comes back to the uranium market, will be the pace of Japanese restarts.
Looking forward three or four years, new plant construction, particularly in China but really spread all around the world, is sufficient that the Japanese become less and less relevant.
But certainly, at age 65, I would like to get paid sooner rather than later. So I’m paying more attention to Japanese restarts.
Nick Giambruno: Doug and Rick, thank you for your time.
Justin’s note: As I mentioned yesterday, to fully take advantage of the upcoming boom in uranium stocks, you need to own the “best of breed.” And that’s exactly what Nick’s found for his Crisis Investing readers. He has a portfolio of four uranium buys… each with explosive upside. You can access these names with a subscription to Crisis Investing. More details here.
And don’t forget that both Nick and Doug will be speaking at our upcoming Legacy Investment Summit in Bermuda next month. We’d love for you to join us in what will be the most action-packed event we’ve ever held. Spots are still available, but they’re filling up quickly. If you’re interested, click here for more details.
Today, more readers respond to Doug’s recent interview on John McCain, which has proven to be our most popular Conversations with Casey of the year so far…
As a young 28-year-old, I had a McCain 2000 sticker on the back of my car. I bought into his BS rhetoric during his campaign. My uncle warned me that having a sticker on a car is a big responsibility and that it’s something not to take lightly. It’s the only one I had and ever had since, and I regret it deeply. He represents everything I hate.
Thanks for the article on McCain. He was a RINO and if not for his father and grandfather’s influence, he would have never made it at the Academy or in his career. He was always self-centered and arrogant which was described as a maverick, just a blowhard really. His funeral and burial ceremonies were overdone and disrespectful to the other POWS of that time period. Don’t miss him at all.
What a pompous, mean-spirited, ill-timed commentary. But, even more offensive to me, is that it is factually incorrect on so many points: e.g., McCain did not cause, in any way, the USS Forrestal fire (check it out on a credible source); and, there were many, many POW aviators who died in captivity. I’m sure Doug was comfortably sipping wine on his verandah while McCain spent five-and-a-half years in captivity, and refused early release offered for publicity reasons by the North Vietnamese (that alone qualifies him as a man of principle). I don’t want anything to do with anyone who can be so pompous and mean-spirited, and WRONG on the facts.
Sir, you forgot that Senator McCain put Sarah Palin out to dry. She tried to carry the nominee, but he stayed silent and then criticized her. Lousy behavior.
It really makes me sad that you have chosen to denigrate the legacy of John McCain. Whatever his life history, let the man rest in peace.
I stopped reading almost immediately after Casey’s statement about McCain’s responsibility for 134 lost lives on the USS Forrestal. Please see Snopes.com on the subject and comment.
Great article. Wish you would do more like it. This is why I signed up. All of the other things you do are very good as well. Please keep up the great work.
As always, you can send any questions or suggestions for the Dispatch right here.
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