As a rule of thumb, commodities are not great investments. But under the right circumstances, a commodity can be an excellent investment.

In the commodity business, they have a saying: “The best cure for high prices is high prices. And the best cure for low prices is low prices.”

The saying captures the ups and downs of the commodity production cycle. When the price of a commodity is high, there is strong incentive to produce more of it. This leads to production ramp-ups: New mines are opened, new refineries built, new crops sown.

Eventually the steady increase in production — which can play out over the course of years — leads to a glut, or persistent conditions of oversupply. This causes the price of the commodity to fall, hence the high prices condition “cures” itself.

But this also works in reverse. When a commodity drops enough in price, and especially when it falls below the cost of production, there is no incentive to add new supply, or even to maintain current levels of supply beyond the minimum required to stay in business. If prices stay low for long enough, capacity starts to shut down. Mines are closed, wells are abandoned, farmers switch to other crops, and so on.

It typically takes a long time to ramp up supply for a commodity — the process plays out over a multi-year cycle — and it also takes a long time for existing production to shrink. That is why commodities have a natural boom-bust, wax-and-wane price rhythm.
The time to consider a commodity for investment is after a long period of low prices, when the commodity has been out of favor for years. Ideally the commodity will be priced below the cost of production, which means the existing producers haven’t been making money, and there is no stomach for new production.

Best of all is when you can see this situation — a commodity priced below its cost of production, with producers down in the dumps — coupled with a very clear trajectory for rising long-term demand.

If a commodity is too cheap to turn a profit for most producers, and the industry outlook is gloomy, and yet you can look out on the horizon and see a major wave of demand coming, that is a truly beautiful thing. That is when a commodity can be an excellent investment and generate large returns over a period of years.

This is exactly what’s happening with uranium.

The long-term demand picture for uranium is extremely bullish for three reasons: Air pollution, climate change initiatives, and emerging market growth. These three factors are driving long-term demand for nuclear power, which relies on uranium as a fuel source.

First let’s talk demand. According to Larry McDonald of the Bear Traps Report, global demand for uranium could surge 50% over the next decade or so. This is due to a wave of new nuclear reactor construction.

For example: The China General Nuclear Power Group recently secured permits and funding for six new reactors in Guangdong province. China already has 18 reactors under construction with plans to build 40 more. Meanwhile, India is building six reactors and has plans on the drawing board for 15 more. Saudi Arabia has two reactors under consideration. Egypt, Jordan, Turkey, and the UAE are making plans, too.

Coal has long been a top global energy source, perhaps second only to oil. But coal, along with vehicle emissions, has created life-threatening levels of air pollution in the major cities of India and China. (India’s air quality is actually worse than China’s.)

As a result of this, government leaders are taking action. President Xi Jinping in China has talked of improving the environment as part of “the Chinese dream.” The pollution in Chinese and Indian cities is no longer just an annoyance; it threatens a way of life. To roll back epic levels of air pollution, while at the same time maintaining rapid growth, nuclear power will have to be a critical part of the solution.

Climate change is a big part of this, too. Regardless of personal opinion on the matter, climate change concerns are now baked into global legislation. All of the countries that signed onto the Paris Climate Agreement are mandated to find ways to reduce emission levels while maintaining growth. For many of them, nuclear power will have to be a part of that mix.

Meanwhile in Europe, climate change is a powerful social issue, which favors a rethink back in the direction of nuclear. In January 2019, an estimated 100,000 people gathered in Brussels for climate change protests. That same day, another 80,000 took part in climate change protests in cities across France. In Sweden,16-year-old student Greta Thunberg has drawn attention and headlines across the world for her leadership in youth climate change protests. And in the United States, the “Green New Deal” will be a major 2020 campaign issue.

All of this favors nuclear power because, when environmentalists work out the math, they come to realize wind and solar alone cannot scale fast enough to replace coal over the next decade or two. Even with wind and solar solutions growing as fast as possible, there is likely to be a serious shortfall relative to the increasing energy demands of the global economy.

But nuclear power, which provides energy at scale, can fill that gap. Emerging market demand growth is a big factor here too. Because once again, for any country that wants to rapidly grow its economy while keeping pollution and emissions in check, nuclear power is almost not optional as a consideration.

In terms of accidents and safety, nuclear power has gotten a bad rap. Many observers of energy technology argue that, when you add up all of the statistical risks — including the pollution factor and its many hidden costs — nuclear power is one of the safest and cleanest forms of energy known to man. This is truer than ever today, as improved reactor designs have greatly improved the safety factor.

Nuclear power has always struggled with public relations disasters. A series of high profile accidents over the years — Chernobyl, Three Mile Island, and so on — led the Western public to associate nuclear energy with three-eyed fish and people glowing in the dark.

In 2011, the Fukushima nuclear disaster in Japan made the public relations problem much worse. Japan was enthusiastic about nuclear power prior to Fukushima. Afterward, the sentiment turned dramatically.

Largely as a result of Fukushima fallout (no pun intended) and a temporary mothballing of reactor plans worldwide, the uranium price plummeted in the years following 2011. Uranium prices traded as high as $140 a pound in 2008; by 2016, the price of uranium had fallen an incredible 87%, to $18 per pound.

Current evidence suggests that November 2016 was the bottom for uranium prices. At the current 2019 spot price of around $25 per pound, uranium is still below the cost of production for most producers. In 2018 alone, uranium mines in across Canada, Namibia, and the United States were shut down.

Remember what the sweet spot for investing in a commodity looks like: A price below the cost of production, causing supply to go offline and producers to shut down, coupled with a bullish long-term demand curve that all but guarantees future demand will outpace existing supply and production levels.

In a situation like this, the price of a commodity can easily double, or even triple, over a period of years. This is due to the time lag between acceptance of new demand and the slow process of bringing high-investment production facilities back online.

This creates an opportunity to look at both publicly traded producers of the commodity, and ETFs or futures contracts that allow for direct investment in the commodity itself.

Position card for CCJ, Cameco Corporation

One of the best ways to invest in uranium right now is Cameco Corporation (CCJ), a Blue Chip uranium producer headquartered in Saskatoon, Canada. Cameco mines and sells uranium worldwide, and also sells consulting and fuel services to nuclear utilities. CCJ is in the green zone as of this writing with a medium risk VQ.

Position card for U-T, Uranium Participation Corp

Another vehicle to consider is Uranium Participation Corp (U-T), a Toronto-based holding company that invests close to 100% of its assets in uranium. Uranium Participation Corp trades on the Toronto Stock Exchange and is currently in the yellow zone with a medium risk VQ. The structure of Uranium Participation Corp is designed to track the ups and downs of the uranium price.


Founder, TradeSmith