Uranium’s rise to fame was a result of the world’s need to reduce its dependence on fossil fuels like oil and gas – not least because they are bad for the environment, but also because there are limited reserves in the ground that will one day be exhausted.
In comparison, there is a greater abundance of nuclear fuels like uranium and thorium which can generate cleaner energy. Uranium must be extracted from the ground and there is still the issue of radioactive waste which takes years to break down.
However, the actual volume of waste is not huge (the amount a person generates in a lifetime would fit into the palm of a hand) and it is a far more efficient source of energy. Of course, the driving factor is to reduce greenhouse gas emissions which are said to cause global warming.
In Britain, the Government has recently pledged to build more nuclear power plants for its electricity, while other countries are stepping up their production to reduce carbon dioxide emissions in line with global treaties. New wind farms and solar power generators are also springing up as part of the clean energy pledge.
So there is great potential for nuclear power as mankind’s global conscience grows.
Making Money From The Rising Demand
Before much of this came to light, uranium traded at a price of around $6.75/lb (in 2001). As news of its potential spread, speculative buyers created a surge in demand, which in turn created price inflation.
Traders around the world became so excited about uranium that the price rose consistently for 47 months straight.
A spot market was created to cater for the new demand, which made it even easier to trade. At its peak in June 2007, uranium could be bought and sold for $138/lb, representing a return of almost 2,000% on an investment made six years previously.
That is why investors are so enthusiastic about uranium. It has had an extraordinary run. But since the June peak, the price has eased off (to $120/lb as of August). This was prompted by two events.
Firstly, the people running nuclear power plants decided that uranium had become too expensive. They collectively stopped buying up future intake to force a wane in demand and allow the price to cool off. For them, the viability of uranium as a fuel becomes unacceptable at $200/lb. Clearly their profit margins were diminishing as the commodity market for uranium took off.
This in turn prompted a moderate sell-off by speculative buyers and investors – the people who don’t actually want uranium for any other reason than to sell it later on and make a profit. Many of these investors had already made huge returns and wanted to bank some or all of that money.
It was also feared that the uranium bubble was weakening and would soon burst. Any market that inflates this rapidly is probably supported by more hype than true value, as was painfully learnt by many during the dot com boom (and bust) of the new millennium.
The Future For Uranium
So where is the price of uranium headed to now? That is the question on everyone’s mind. First it must be accepted that this is a volatile market. Dramatic gains or losses can be made in situations where market sentiment plays the leading role.
And that is exactly what is happening now.
There is not enough demand from existing power plants to sustain the current price. It is merely kept high by the investment community which understands that the demand for nuclear fuel will be sustained in the long term, as more power stations are built around the world and capacity increases.
However, greater demand will be met by an increase in supply. Mining companies have fast-tracked their uranium exploration activities to get new mines into production. This commodity is suddenly worth a lot more than it was a few years ago, and is far more profitable to extract and sell nowadays. Remember that, while it can take years to get a major mine up and running, it can take even longer to build a nuclear power plant to create said demand.
What The Brokers Say
All of this will ultimately create stability in the uranium market. Stock brokers admit that uranium could reach $200/lb in 2008, as the continued effort to reduce global warming creates renewed enthusiasm for going nuclear, and as power plants themselves are forced to start buying again.
Generally though, brokers are more cautious and expect that as the supply-demand deficit flattens out, the price will settle to around $100/lb within three years.
As a fuel of the future, uranium is expected to trade at a fair value in the realm of $45/lb. While that long term forecast may look pessimistic, the truth is the market is still highly volatile and offers real money-making potential in the short to medium term.
The key – as always with investing – is timing.
