Mike’s note: Today, we bring another trade idea from contributing Market Minute editor Eoin Treacy.
Eoin is a medium-term trader who looks in the coming weeks for opportunity – rather than the hours or days ahead. He looks at charts to determine the macro picture in the market, and spots ripple effects that carry on to smaller segments of the market to create big profits…
His latest idea, on a once-prized commodity showing signs of life after a brutal bear market, really impressed me and the team. And we just knew we had to pass it along to you…
The recent hysteria over GameStop stock got me thinking about another market anomaly…
Specifically, the mania in uranium stocks between 2005 and 2007.
Back then, small investors were lured in by forecasts that the uranium price could go up forever.
And it made sense at first glance. In the late 2000s, the idea of moving to carbon-free energy was gaining traction. And uranium was proving to be a vital asset in that goal.
Now, while uranium plays a vital role in nuclear reactors, it’s really just a small part of the cost of running a power station. This didn’t matter to retail traders, though…
They believed the nuclear plants would pay any price to secure supply. And since there hadn’t been any investment in uranium mining supply since the end of the Cold War, a race began to build mines. And, of course, when supply is low and demand is high – prices rise.
So, investors went all in on one-way bets and uranium shares went wild. Some rallied over 4,900%.
But after the peak, many of the best performing stocks eventually went bust…
The financial crisis in 2008 killed off any remaining enthusiasm for miners. Then, the Fukushima earthquake happened in 2011, and the ensuing nuclear meltdown caused reactors to shut down all over Japan. As a result, the price of uranium dropped sharply and put a lot of miners under pressure.
But, some companies used these conditions to their advantage. Kazatomprom, the largest uranium miner in the world, produced over 40% of the global uranium supply from its operations in Kazakhstan at the time.
They decided to embark on the price war to regain their market share by flooding the market with uranium. It worked… and the price of uranium tanked, successfully killing off the smaller companies.
Now, though, there’s reason to believe that uranium could rise again. Because of widespread shutdowns during this pandemic, we’ve seen the uranium supply dwindle. As a result, the price of uranium has risen 20% since the pandemic began last year.
Supply shortages skyrocketed after Canada’s biggest uranium miner, Cameco, temporarily closed down their massive Cigar Lake mine due to concerns about COVID-19.
The rising price suggests supply and demand are finally back in balance.
Plus, just last week, news came out that the U.S. Nuclear Regulatory Commission (NRC) is looking at extending the licenses of all 94 U.S. nuclear reactors to 100 years. That would ensure they can all continue operating until 2069.
At the same time, countries around the world have adopted aggressive carbon emission reduction targets. Nuclear power is not a popular option, but it is a proven carbon-free technology. It’s hard to imagine countries achieving their carbon goals without using it.
If the U.S. doesn’t close any reactors by 2069, Bank of America Securities believes it would represent an additional 26 million pounds of demand. That’s just in the U.S. If other countries make the same decision, it could create a worldwide supply deficit.
These conditions are ripe for a bull market… And uranium stocks are just now beginning to move.
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The uranium mining sector will take off if that occurs, taking prices with it. If countries move back into building new reactors, we could likely see a repeat of the 2005-2007 bull market – where certain uranium stocks climbed by nearly 50x.
The best way to play the coming uranium bull market is by buying the Global X Uranium ETF (URA).
URA holds industry titans like Kazatomprom, Cameco, and NextEra. Those three companies alone represent 47% of the portfolio, which has more than doubled since March but remains 87% below the 2011 peak.
That’s the kind of trade I like.
All the best,
Co-editor, Market Minute
P.S. I thoroughly enjoyed answering all of your questions in my last essay on cannabis, and I’m always looking forward to hearing more from you.
So, if you have any questions this week about uranium, bitcoin, or anything else that comes to mind – please send them my way at [email protected].