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Friday, May 11, 2007

more thoughts on uranium prices

In all honesty, any thoughts I have on uranium prices at this time are probably wasted thoughts. But I find it interesting.

I read another uranium price prediction article today. First Uranium Corp, a South African Developer, says prices this year could reach as high as $150. This is not exactly a bold prediction considering the price has been on a continuous upward climb to $120 today. A bold prediction would be saying it might drop to $75 or climb to $250.

Looking back, I've been puzzled by how consistently low predictions have been in the past. Even David Miller who was the boldest and most accurate underestimated the increases. So after all that, people still don't want to look stupid by claiming $250. I see this over and over.

The problem is that prices above $115 have never happened before. [While previous jumps had been greeted with cheering, the jump to 120 was met with a strange silence.]

It's like the DOW being stuck at 1,000 during the 1970s. It was considered the ceiling, like the dial on a guitar amp that only goes up to 10 (or 11 in some cases). No one would expect to turn the dial and magically start seeing numbers appear in front of the needle: 12, 13, 14, 20, 30, 50, 100. That's never happened before. But more importantly, there are well proven laws of the physical world that demonstrate why it won't happen.

No one has seen uranium prices climb continuously without falling back down again due to 1) the government scaling back it's price support program, 2) nuclear accidents putting the brakes on nuclear power development (but only in the US, and it still didn't stop uranium demand from increasing in the US), or 3) the government dumping huge amounts of uranium into the market after the Cold War from downblended weapons. So even worse than the guitar amp dial, we're instinctively expecting the dial to snap back down to 4 or 3. I think that's why uranium stock prices have been dropping lately.

But things happen all the time that have never happened before. They're surprising when they happen, but then later, they just get dumped into the list of "already happened" things that are considered "normal". It's a big scam in the human mind.

Unlike the guitar amp example, with uranium there are very well established laws of economics which say the price will continue going up and that it won't come back down. But because this is unprecedented, we think it won't happen.

Up until 1972, oil prices had been declining steadily and were amazingly predictable. But if you look at this chart, the future would look absolutely nothing like the past (and note how inflation makes the picture better). And there were good reasons for why everything changed. If someone considered investing in oil in 1972, would you say it was a bad idea because the prices would fall back down in the late 1990s? Black Swans happen, and there are certain conditions where they're quite likely.

I contend that the situation with uranium right now is severe. Like I've said many times in the past, we have extremely inelastic demand combined with extremely inelastic supply which is far lower than demand, and that demand has always been growing and the growth is accelerating very fast with China building 2 reactors per year, Russia, India, and lots of other countries developing reactors. Eventually supply will catch up, but it's going to take a very long time. All facets of the industry need to expand.

UPDATE same day:
Kelvin Chan has an article in Seeking Alpha listing recent analyst uranium price predictions. Excellent! What I'd really like to see are predictions from 2005 and early 2006. But let's take the oldest 5 predictions in the list (without checking beforehand):

Sept 12, 2006: CIBC $70 by the end of 2007
Sept 12, 2006: Deutsche Bank $59 in 2007
Oct 16, 2006: John Zechner Associates $80-$100 (unknown time frame)
Oct 18, 2006: Nufcor >$60 in 2007
Oct 18, 2006: Casey Research $100-$150 (unknown time frame)

Looking ahead at more recent predictions shows the same thing.

My prediction? Well, I'd say any guess is likely to be wrong, possibly in a big way. But forced to guess, I'd say $150 by year end 2007 and $300 by year end 2008. And I don't think there will ever be a stable long term price. I guess it will jump to high levels maybe like $400 and dip to levels like $75, but I'm guessing that it won't spend a lot of time below $100 going forward.

UPDATE May 12, 2007:
I had noticed earlier in the week that UxC's spot price also jumped up to $120, so I guess it's official. You've got to figure that right now, with the new uranium futures tied to UxC's prices, that UxC would feel like they don't want to seem like they're pushing the price up. But they have standards for computing the price, so there's presumably not much wiggle room. On Friday I got a small pile of extra cash to invest. I bought more Strathmore Minerals and I'm trying to buy some more CFRI.

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