The Other Yellow Metal

Nuclear energy production is not the environmental hazard you might have thought…and it’s cheap. In fact, long term, it seems like the only answer to the looming energy crisis. Here’s how to profit…

Over the next decade or two, energy prices are going to reach shocking levels, and the price of uranium, inextricably tied to energy, is headed up as well. I first recommended uranium companies in October 1998, when the metal was trading hands at a paltry $9.50 per pound. Since then, U3O8 has risen to $18, and I believe, due to growing global energy demand coupled with the relative costs of alternative fuel sources, it’s going much, much higher.

Global electricity use is projected to increase by 66%, from 13 trillion kilowatt-hours in 1999 to 22 trillion kilowatt-hours in 2020. In North America, the growing demand for power has reached the point where the grid is increasingly vulnerable to massive failures, like that of last summer, when the lights went out on 50 million people.

To meet this demand, energy has to come from somewhere, and nuclear power is the only sensible choice. This conclusion is not mine alone…as I write, there are 30 new reactors in various stages of construction around the world. China alone is planning at least one new reactor per year for the foreseeable future. Even in the United States, despite all the hand-wringing about nuclear power, the share of electricity generated by the nuclear has risen from just 4.5% in 1973 to over 20% today…making it the second most frequently used fuel source for producing electricity (after coal).

Uranium Supply: Pricey Oil

Oil currently accounts for 40% of the world’s energy consumption, and world oil consumption is projected to increase 2.3% per year for the next 16 years – driving the demand to 120 million barrels per day in 2020. Against that consumption, the world is currently producing on the order of 77.5 million barrels a day, but the threats to supplies coming out of the Middle East, Nigeria, Venezuela and elsewhere (for instance, the Strait of Malacca) are growing…and, due to reserve depletion, are only going to get more difficult and costly to recover. As I write, oil is nearing $50 per barrel. While that price will certainly ebb – maybe all the way back into the $30 per barrel range – the days of $18 a barrel are almost certainly gone for good. While higher oil prices carry many negative consequences – on household spending, inflation and corporate profits, to name a few – for the sake of this discussion, what’s important is that pricey oil makes alternative forms of energy more appealing.

Natural gas? There is a general preference for natural gas over oil and coal for power generation, because it is clean and gas-burning plants can be built relatively cheaply and quickly. In fact, it is the fastest-growing component of energy consumption, surpassing coal for the first time in 1999. Energy mavens say that by 2020, it will exceed coal use by 44%, but I doubt it. Gas will price itself out of the market before that happens.

Coal and nuclear are the only feasible sources of mass energy with anything like current technology. There are many hundreds of years of cheap coal available, but the stuff is an environmental nightmare compared to nuclear (despite what the scaremongers would have you believe). Other commonly discussed energy alternatives face distinct disadvantages, or are years from mass commercial viability or aren’t mass power solutions at all.

The looming energy shortage has even become clear, however belatedly, to the U.S. Department of Energy, which recently announced incentives to encourage U.S. power companies to apply for licenses to build new nuclear plants (the first in 25 years). In addition, the DOE is even considering building a plant of its own. This is a big change from just a few years ago, when the talk was of literally closing down the industry, not only here, but worldwide.

Uranium Supply: Uranium Demand

How great is the demand for uranium likely to get? Saskatoon-based Cameco, the world’s largest uranium miner, estimates that even without the potential for added demand due to rising oil and natural gas prices, global uranium demand should average 194 million pounds per year from 2003 to 2012, with the United States using 40 million pounds of that amount from 2006 onward.

What about supply? Uranium is more abundant than tin and 10 times more abundant than silver. Yet a chronic supply/demand imbalance has developed in yellowcake, as U3O8 is known. The best evidence of this is that the industry has been living on inventory since 1985.

Supply is running at about 135 million pounds per year, with mines contributing only 79.2 million pounds per year. In Canada and Australia, the big dogs in uranium, few new mines have come on stream, largely as a result of recently poor prices.

Of course, if prices continue to rise, prospectors will redouble their efforts to find new deposits. But it typically takes up to 10 years from discovery to production for a well-sized mine.

The balance of the uranium needed to keep the world’s lights on today comes from aboveground supplies, like weapons conversion, MOX/breeders and utility stockpiles. However, these supplies are not growing, while demand is – rapidly.

Using the 194 million pounds per year demand forecast and subtracting roughly 50 million pounds of supply from above- ground sources results in a 144 million pound per year difference that mine production needs to meet (nearly double current output). That’s not going to happen, except at much higher uranium prices. While longer-term price forecasts are worth little – there are just too many variables – I’ll make a guess. Uranium will trade over $25 within the next 12 months and is quite capable of going to $30, $40 soon, and over $100 by the end of the decade.

Success in speculation requires a willingness to look beyond the hype and hysteria about things like nuclear power. With the exception of a small group of pathetic Luddites, no one is ready to freeze in the dark. To sustain the increases in energy demand dictated by a growing world economy, there is no question that uranium will need to play a key role. Uranium, after decades of being the unwanted stepchild of energy sources, is now likely to offer better percentage returns to speculators than oil, gas or any other energy alternative.

Regards,

Doug Casey
for The Daily Reckoning
August 31, 2004

"Professor Bill Maguire of the Hazard Research Centre and University College London wants Spanish authorities to start monitoring Cumbre Veija in the Canary Islands," reports The Australian. Cumbre Veija is an active volcano that is expected to erupt again, although no one knows when.

"He said a slab of the volcano the size of a small island could be sent plunging into the ocean by an eruption and trigger a tsunami, sending a 100-meter wall of water towards the U.S. Eastern seaboard at 500 kilometers per hour that would inundate New York and other cities."

If a giant wave were to slam into Manhattan – surely that would provide stimulus to the economy…especially if it happened during the Republican National Convention. Whether it would be a good stimulus or a bad one – we can’t say.

Investors seem to be waiting for something to happen. Volume in trading markets is low. Gold sits above $400…the Dow above $10,000…where both have been for many months, along with the dollar at $1.20 per euro.

And bonds? A few months ago no surer bet could be found than that U.S. bonds would fall in price, either because the economy was heating up, or because the dollar was falling, or because inflation was rising. Warren Buffett bought $19 billion worth of foreign currency assets to protect himself from it.

But so far, nothing has happened. Bonds rose yesterday, again. The yield on the 30-year Treasury is nearly 5%, about where it has been for a long, long time.

When nothing happens for a long time, people begin to think that nothing ever happens. And yet, sooner or later, something always happens – a tsunami…a war…a depression…

Everyone is ready to greet the "new era"…but no one wants to watch the old one die. But that is what must happen. This era must die. It must pass away. There must be wailing women and gnashing teeth…fire and blood…bankruptcies and tears.

For it cannot last forever; nothing can. Consumer spending is rising eight times faster than income, says the latest report from Bloomberg. And every day, the United States spends $2 billion it doesn’t have. Each day, the government adds about $1 billion to its debt. And each day, consumer spending outpaces consumer incomes by about another $1 billion.

And everyone seems to expect what can never happen – for things to continue like this forever.

A man buys a house he cannot really afford – counting on it to go up in price so he can "take out equity." The bank that lends him the money sells the mortgage on to a financial institution that packages it as a derivative, which is then sold to another financial institution. Everyone makes money – the homebuilder, the bank, the finance company, the insurance company, the suppliers and furnishers. And all up and down the financial chain, people count on it for retirement, insurance payouts, investment rates of return and so forth. And yet, the whole transaction was based on a lie – artificially low lending rates…and a belief that they will stay low permanently.

According to the Bank of International Settlements, there are about $250 trillion worth of derivatives in the world financial system – most of them resting on the same impossible dream…that the position of the planets in the financial solar system is fixed.

The end of every age must come with the same sort of mass delusion. All that matters is what is happening here and now, for everything that is now is eternal. In America today, people watch reality TV and believe it more authentic than the lives around them…and the TV news is more convincing than what they can see with their own two eyes. The rush and noise of contemporary, electronic reality drowns out the warning whispers of the dead…

More news from Eric…

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Eric Fry, from somewhere east of the Hudson….

– Last night, your New York editor treated his girlfriend to a delightful dinner on the banks of the Hudson River, her birthday being the stated occasion. They dined together at the Harvest on Hudson restaurant, a wonderful Italian eatery in Hastings, N.Y., about which your editor has raved on several previous occasions…The Harvest is simply a great restaurant – it is that rarest of culinary creatures that offers a menu as superb as its location. Your editor would visit the restaurant often even if it were not his girlfriend’s favorite…

– After finding their way to a table overlooking the river, your editor and his girlfriend sipped mojitos and slurped malpeques until the hot August day became a balmy August evening. Meanwhile, some 50 miles downriver from the Harvest restaurant, the Republican conventioneers were busy filling Madison Square Garden with hot air.

– John McCain, Rudolph Giuliani and sundry other Republican luminaries took turns heaping praise on their commander in chief. Said McCain of President Bush: "He has not wavered. He has not flinched from the hard choices. He will not yield. And neither will we."

– It’s true that President Bush hasn’t flinched from making hard choices; but neither has he flinched from making bad choices…maybe a little bit of flinching isn’t such a bad thing. Indeed, some of the world’s most successful investors owe their success to flinching at just the right time. Warren Buffett flinched in 1969, closing down his investment fund and withdrawing from the stock market. Five years later, after stocks had tumbled about 40%, Buffett regained his nerve and jumped back into the stock market…and, eventually, became a multibillionaire.

– Is flinching a lost art? Have investors lost the instinct to lose their nerve? Most gauges of investor sentiment are registering extreme levels of optimism, as the lumpeninvestoriat holds fast to its faith in stocks for the long haul. These days, very few investors are flinching, although they wavered a bit yesterday. The Dow slipped 72 points, to 10,123, while the Nasdaq tumbled 1.4%, to 1,836. The dollar also lost ground, falling nearly half a percent against the euro, to $1.205. The dollar’s drop sparked buying in the gold pits, as the yellow metal jumped $4.60, to $410 an ounce.

– Consumers aren’t flinching either. Even though U.S. personal incomes rose a meager 0.1% in July, consumer spending soared 0.8%. In other words, Americans continue to spend more than they earn – a self-limiting phenomenon.

– Debt cannot finance consumption forever. A Day of Reckoning will arrive, or so the ancients warn us. But since that day has not yet arrived, your editor would nominate dinner at the Harvest as a worthy candidate for debt-financed consumption.

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Bill Bonner, back in rural France…

*** It is these last days of summer that bring on this "fin de siecle" mood. The sun is cutting a lower arc each day…the days are crisp…the nights are cool. And last night, the full moon had a cold, beautiful aspect – so bright you could wander around without a flashlight. We heard the screams of animals – birds, cows and beasts we could not identify. The earth was alive. And terrifying.

*** Today, workmen are taking down the party tent as we close up the house. The shutters, doors, windows are locked. Lawn chairs are put away. Gates closed. The world of warm, sunny reflection will be left behind…and a new world taken up…a world of cities, trains, airplanes, laptop computers, rain and tight schedules. A world of work…offices…meetings…

And in these last dying hours…when the ground itself seems to exhale its warm summer breath, with morning fog laying in the hollows of the fields and steamy mists rising from the pond…we wonder: Somewhere in the vast oceans of the future…there must be a tsunami forming, one that will swamp this sweet life of ours…and drown us in our own delusions.

*** In addition to spending money we don’t have at a pace we can’t sustain, we also use the world’s supply of oil at a pace that can’t last. Each day, 1.4 million barrels of oil are burnt. According to some estimates, the world will never produce more…and begin to produce less sometime soon. But this year, the Chinese will put 5 million more cars on the road. And 5 million next year too – and so on.

*** Buy a car, get one free

"New Jersey Nissan dealership offers a free used car to anyone who buys a new car.

"It’s hard to believe," said Reuters, "but with a deal more commonly seen at clothing sales, one car dealership in New Jersey has upped the ante to lure buyers who have become blase about the usual incentives offered on vehicles these days.

"For buyers who purchase any new 2004 or 2005 model Nissan, the Route 46 Nissan dealership in Totowa is giving away a 2003 Nissan Sentra, usually an off-lease or traded-in vehicle."

*** A Daily Reckoning reader:

"We went from hunter-gatherers with memory retentions that were long, experiences that were passed on in epics of storytelling, which were needed for survival; people with bad memories were Darwinized out of existence."

"Today, it may be the reverse process that predominates – why remember anything? Why value tradition? Why value value? Is it all bunk?

"Then due to running out of ‘easy prey,’ or sufficient prey, perhaps, some human hunter-gatherers went to agriculture for entropic reasons – it was harder work than hunting, as difficult as that might be to understand, but we might have had no other choice.

"Maybe we just bypassed those others left behind – those who initially remained as ‘poor’ hunter-gatherers – with our technology…and later, unfortunately, pushed them to follow us, too (or eventually annihilated them).

"Then the Industrial Age bypassed the farmers. We learned to write, read and forget. Then the Info. Age bypassed the poor manufacturers and makers of things, or did it?

"Maybe it is a ‘Good Thing’ we still have the Amish and the Mennonites, in case we ever need the horse and plow again…hoping that those with the ancient knowledge might have the good grace to show us how to use those implements, let alone how to make them?

"Where does it say, with no contradictory whisperings from D.P. [dead people], that ‘Life Always Gets Easier’ as we ‘advance’?

"The energy cost of keeping this type of Life going and the cycles advancing ever more gets higher and higher, and many sane people question the viability, the sustainability, the premises being made, of such mad rushing into the future.

"Will there always be a solution around the corner? Will the naysayers never be right? Prudent optimism appears to be in short supply; blind (short attention span type) optimism does not.

"I sometimes think that we expect God himself will come down from heaven and give us the tablets with the 10 Technological Solution Commandments that, if followed, will solve all of our problems."