Late summer 2011 gold at $1,923/oz. seemed over-extended and due for another correctionand did. Gold prices pulled back to as low as $1,528/oz. by May 2012, settling at around $1600/oz. or -15% which is not unusual. What does seem unusual is that instead of gold prices correcting for only a few months, this time it has been around 16-months with gold remaining flat at around $1,670/oz. today.
Our September newsletter asked if our chart below indicates that gold and silver is set to rally.
Gold prices did bump-up close to $1,800/oz., and silver to $35/oz. the next monthOctober. However gold has since settled back into the saddle, range-bound again between $1,600-$1,800/oz. Unless you were an extremely nimble trader, I'd call this more of a false start than a tradable fall rally.
Some technicians may see the above patterns more as Bullish Descending Wedges that can last months, rather than Pendants which generally last a few weeks. If so, a break below gold's $1,600/oz. base might signal a Bearish Reversal, whereas a break above gold's upper $1,800/oz. resistance level might signal a Bullish Continuationlike it did in 2006 and 2008. Whichever way gold moves to eventually break from its pattern could be dramatictypically wider bases mean bigger moves.
Gold's main fundamental driver continues to be the Debase-Race between the Dollar and the Euro, which shows no signs of letting up anytime soon. Gold bulls might also take comfort in Japan's recent announcement of it's lacing-up to lower the value of the Yen, towards stimulating its own economy.
Will Sleeping Dogs Bark In 2013?
We have mentioned several times how mining shares in general have uncharacteristically under-performed during this metals bull-market. In other words you could have seen better returns by passively holding bullion, or their ETFs, rather than most mining shares.
It's hard to argue with gold returns of around 500%+, or 40%+ annualized, over the last decade. But what's good for gold has always been good for gold mining shares as well. So why not this bull runis it different this time? Maybe they just haven't broken out yet! You need to weigh your reasoning.
Some believe that scandals like Bre-X Minerals in the 1990's have kept investors away from mining shares. But this is nothing new and affects many industries; names like Enron, Worldcom and Lehman come to mind. Mining markets have always recovered as metals prices cycle higher again.
Bullion ETFs SPDR Gold Trust (NYSE: GLD) and iShares Silver Trust (NYSE: SLV) didn't exist during past secular metals bull-markets. ETFs compete for investor attention and may have liquidity advantages; however bullion, precious metals coins and their certificates have been around forever.
Others point to higher exploration, development and production costs for mining companies. This directly affects profitability and share returns, but does not explain why some of the largest gold companies have never been cheaperwith near-record profits and gold prices.
I could see gold producers P/Es and share prices being constrained somewhat if the overall market was cheaper, but this doesn't even seem to be the case. Here are some major North American indices trailing 12-month P/E ratios: Dow Industrial 15.37, Dow Transportation 18.47, Dow Utility 21.94, Nasdaq-100 16.64, S&P-500 17.92, S&P/TSX Composite 25.60, Russell-2000 31.24.
While most of these major indices don't seem overly expensive, instead of being cheap compared to major miners they actually seem relatively expensive. Here are the trailing P/Es of some of the major gold and other metals producers: Barrick Gold (NYSE: ABX)(TSX: ABX) 9.50, AngloGold Ashanti (NYSE: AU) 12.10, Gold Fields Ltd. (NYSE: GFI) 9.60, Harmony Gold Mining (NYSE: HMY) 8.20, IAMGOLD Corp. (NYSE: IAG)(TSX: IMG) 8.10, Compania de Minas Buenaventura S.A. (NYSE: BVN) 8.60, Freeport-McMoRan Copper & Gold (NYSE: FCX) 11.10, BHP Billiton (NYSE: BHP) 13.60 (world's largest mining company).
So maybe the problem is the future outlook of gold prices? I don't think so; most analysts see record-high gold prices in 2013 or over the next few years. It's hard to believewith gold prices now over $1,600/oz.that the S&P/TSX Venture Index was cut in half over the past two-years. The ^TSXV is now at the same level it was back in 2002when gold prices were around $300/oz.
Conclusion: When rational investors find value, the market tends to recognize this... eventually! After an extended correction, institutions must be eyeing extremely low valuations of gold producers for the turn. But value alone may not be enough for them to act now; they probably want to see gold break solidly above its technical $1,800/oz. resistance level. If, as I believe, this catalyst sparks a major producers rally this year, this usually spills over quickly and gets the juniors barking as well.
Uranium Poker & Russia's Tell
With uranium, investors often have to dig more than usual and even read between the lines in order to get information. This can involve piecing together what utilities and uranium companies are doing, to figuring out what governments might really be planning to do. It's like a game of Texas Hold'em!
For example, it's not uncommon for utilities to sign off-take agreements with uranium producers on undisclosed terms. How can you assess the value of a deal to a uranium company when you might not know the purchase price, quantity, or other key termsto even the name of the utility?
Predicting what governments will actually doversus what they say they'll docan be confusing and costly to investors. Even if they intend to do what they say, will they even be around long enough to do it? Here's a few examples that have affected public perception and uranium's market values:
After Japan's record earthquake and tsunami in March 2011, and the Fukushima Daiichi nuclear plant accident, everyone questioned the safety of nuclear power. Facts such as reliable low-cost energy being produced from nuclear reactors since the 1950's, that the power plant was 40-years old and overdue for safety upgrades, and that not one of the 19,000 killed was by radiation, were ignored.
The Japanese government then shut down all of its reactors and promised to get out of nuclear power. This may be what the public wanted to hear at the time, but didn't anticipate their reaction to higher energy costs and rolling blackouts. Two reactors are already back online and Japan just elected a pro-nuclear government thus this process should accelerate. World-Nuclear.org shows that in addition to Japan's 50 operable reactors, it has 3 under construction, 10 planned and 3 more proposed.
Other nations like Germany shut down reactors and promised to get out of nuclear power. This seems strange considering that Germany didn't have a nuclear accident, is not earthquake prone and doesn't have much shoreline for tsunamis to strike. However, just as Japan should have realized that nuclear power is not the real problem, Germany is now dealing with high power rates and blackouts. More energy is being imported from Francethe world's largest exporter of electricitythat gets around 80% of its needs from nuclear power. It will be interesting to see how the German's react at the polls this year when realizing that they are consuming French nuclear powerinstead of their own.
It was not surprising to see uranium and uranium stocks fall after Fukushima. However the extent of the fall and how long it has lasted seems unjustified. But again, even when you believe a company, industry, or a commodity is deeply undervalued, a catalyst is often needed to spark a rally.
Uranium's Next CatalystPick Any Playable Starting Hand:
AKs - Many uranium-mining projects worldwide are not economical at current prices. Either the price of uranium has to go up soon, or mines will keep closing. Most of the largest uranium developments that have been deferred recently will remain that way until uranium prices double.
JJ - The growth fundamentals for nuclear power and uranium demand have never looked better. There are more nuclear reactors planned now than even before Fukushima. Globally there are 435 reactors now operable with 167 planned and 317 more proposed.
QQ - Valuations must be lowthe big players seem to be positioning for higher uranium prices. For example, China has been stockpiling in preparation for its new reactors. While most juniors are scrambling to raise or preserve cash, major producers and utilities are still spending. Paladin Energy (TSX: PDN) just received the final tranche of a $200M prepayment for a long-term supply contract with Électricité de France (world's largest nuclear utility). Cameco Corp. (NYSE: CCJ)(TSX: CCO) just completed buying uranium trader NUKEM Energy, plus $430M for Yeelirrie in Australia.
KK - Increased M&A activity recently may be signalling a bottom. The hot uranium market prior to Fukushima saw 7-transactions over 4-years, versus 9-transactions over the last 2-years. Our past newsletters discussed the CA$654M takeover battle between Cameco and Rio Tinto (NYSE: RIO) for Hathor Exploration. Just last month Denison Mines (TSX: DML)(AMEX: DNN) announced its intention to buy Fission Energy (TSXV: FIS), and Uranium One Inc. (TSX: UUU) agreed to go private via a buyout by its Russian majority shareholder ARMZ.
AA - The global uranium supply deficit will get worse. Excess supply from Japan and others after Fukushima is drying up. The world mines 140Mlbs. but consumes 180Mlbs. annually. Most of this deficit has been filled for years by converting HEU from Russian nuclear warheads to LEU fuel. The Megatons to Megawatts program is scheduled to end this year, removing around 25Mlbs. annually.
Wildcards - With Japan's pro-nuclear government winning by a landslide, how quickly will it's large operable fleet of reactors be put back online, and planned reactors built? How will Germany vote this year? Will the public's perception of nuclear power improve there and elsewhere, as a result of using more coal and other dirty fuels, higher energy rates, and blackouts?
Now Let's Play Some Poker!
Think about the AA and KK scenarios. Russia's state-owned JSC Atomredmetzoloto (ARMZ) is taking Uranium One Inc. private by buying the other half it doesn't already own. My read is that if they felt that uranium prices might head even lower, why not just waitthey already own a controlling interest, making it unlikely someone else would make a move? Why now?
How much is uranium's $44lb. spot, or even $60lb. long-term price, factoring in the world's increasing supply deficit after the Megatons to Megawatts HEU program ends in November? Perhaps the market thinks this is just a bluff to talk up uranium pricesthat the program could simply be extendednot unlike OPEC talking up oil prices with threatened cuts, followed by no real supply changes.
All indications are that the HEU program will end this year. Russian nuclear power is expanding, with 10 reactors now under construction to be online within 3-years, with 28 more reactors planned. Even if they could extend the HEU program, they likely need to hold-on to these uranium supplies. Actions speak louder than words and perhaps the Uranium One buyout and other purchases are Russia's tell.
Uranium Mining Companies
Many analysts are bullish again on the uranium space and see a new renaissance underway. Our website's homepage and Reports tab Contributed Content section post interesting articles daily on a variety of resource companies. Last week Cantor Fitzgerald analyst Rob Chang was interviewed in The Energy Report posted under the title: Is 2013 a Catalyst Year for the Uranium Market?, where he identifies 16 uranium companies on the verge of big breakthroughs, including a few takeover candidates.
Nuclear power continues to be the practical solution for a growing world that needs abundant, reliable, low-cost and environmentally safe energy. We've been writing about its advantages and the fundamental long-term growth prospects of uranium and uranium mining companies for two-years. For more on 11 uranium companies we follow, read the January 22, 2013 InvestorsGuru.com interview in The Energy Report by Streetwise Reportsalso posted at our website under the title: Uranium: Energy Solution and Risk-On Opportunity.
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