In the past thirty years we have seen several bubbles grow and eventually pop, lasting no more than a year or two on average. Markets and their perception are based around investor sentiment which is reflected to some degree by public sentiment. I have transformed my self several times over in utter confusion over which theory; 'based on key fundamentals or price action', dictate the markets.
The problem is that we do not consider the perspective of individuals rather we consider groups, but groups are not known for unity either. It is human nature to argue/discuss and finally agree/disagree with the conclusion. Today a great deal of, "murky waters", float in the markets whether they are commodities, equities, bonds or currencies. All the momentum in the markets is geared around two emotions; Fear and Greed. Technical indicators are not helping to find an entry point in this market.
People go long or short in the markets based on these. If we have a major issue in the Middle East we tend to see this affect the oil sector. If we see war perceived or some incident occurs, we tend to see safe havens invested into. Institutional investors are looking at longer term outlooks. While individual investors/traders tend to look at shorter term outlooks. Things really begin to move when the two groups' thoughts merge.
When this occurs, we begin to see some very positive or negative moves occur on a large aggressive scale each party holding hands and linking up or down like sticky monkeys. The problem is the time line. While most investors look at the daily charts I think in the case of Uranium, it is necessary to look at weekly and even monthly charts considering the possibility of very long time lines.
Take into consideration the 2008/2009 scenario. It was retail traders that began to move out of the markets early in the year of 2008, which was followed by the larger institutional investors. However note that nothing would have moved if there was no buyer on the other side and in this case I would suspect that market movers actually bought the stocks being dumped. This is the only group that has the capacity to absorb the loss, their objective was based around past experience knowing very well that the probability of markets completely collapsing was not likely.
In such a case they gambled on purchasing the stocks all the way down but as panic reduced after a month this momentum began to drop off but there was no momentum to buy back as Fear had set in, however at some point the greed line crosses over the Fear line and bargain hunters began to slowly get back into the markets. They were taken aback by the markets once more rapidly going down in March 2009, but that momentum dropped and flattened out. The market makers made money on either side of this time. However since that time there has been very little action in Uranium stocks as the time line has been stretched.
There are other kinds of investors in the markets and these are trend followers. They do not consider what they are investing in or why events occur. Their main factor is the price and they believe that the price of any subject will tell you everything there is to know. They know that they cannot get the news ahead of the price movement nor do they have the resources to preempt the move. They do not need a rational reason as to why a momentum has occurred. When a momentum does begin, trend followers may accentuate the process. This is the reason why markets may drop further then expected or vice versa. However they are usually not entering the markets at the end of it so this is credited to the retail sector that may consider that the trend has more leg to run. The main demand for Uranium are through contracts and these are very long term. this must be factored into the price action time line.
There are two points at which the trend followers are not in the markets and that is the very top or at the very bottom. At these points we have contrarians in the markets looking for a U turn and they are the main line of attack when the markets are at the top or bottom. Trend followers sit on the side line keeping a watch as to if the subject price will make a U turn or if it will break out. Either way they will be in. If the contrarians are wrong they will have stop losses that will be taken out and at the same time the trend followers longs will be activated. This provides added volume which will be watched by various other retail investors. These will be made up of fundamentalists as well as amateurs.
If there is enough momentum created we will see reversal movement in the price. In a very short space of time the volume dwindles and we see the price float a little before the news of the price on the subject floats into other sectors. At this point more movement comes back into the market or the alternative is that the price was just not high enough to create interest. It is at this point that investors looking for reasons as to why the price moved in the first place will decide if there is a valid point to go in. If this does occur the trend followers will add more momentum riding the trend.
There are hundreds of thousands of stocks out there so investors, trend followers, contrarians, market makers and amateurs break down all the stocks into sectors. They then consider which sectors have momentum developing either with the potential to move up or to move down. In terms of the Uranium sector it probably rests at bottom of this list.
In the late eighties we saw the tech sector begin to gain momentum, in early 2000 we saw the gold and silver sectors as well as other commodities begin to move. In mid 2000 we saw the Uranium sector begin to gain momentum. At the time the big news was the possibility of a Uranium shortfall occurring due to Cameco's (NYSE:CCJ) Cigar lake mine not being able to come online. Despite a one year bull the price of Uranium began to drop and in 2008 accentuated by the world markets dropping, the Uranium stocks took a serious dive. These stocks began to regain momentum from 2010 until 2011 when they were hit by the Fukushima disaster. While the event had very little to do with human error, the damage was done. The last time such an event occurred it took Uranium nearly 15 years to regain focus.
There are several differences between what occurred at Chernobyl and what occurred at Fukushima. The number of Nuclear power stations being built had not gained momentum, while when the Fukushima incident occurred there were more than a few power stations being constructed. Chernobyl was considered a human and technological error, present day designs have factored in and rectified the safety issues. The cost of these projects had to be weighed against several good reasons to stop work on them. When Chernobyl occurred there were very few stations under construction but the momentum was gathering pace. At the time the demand for electricity was considerably less. Further still it required a complete changeover of what alternative energy source would make up for the loss of supply from these in the future.
A number of other reasons also required to be taken into consideration including the importance of dependence of energy supply on other countries. Nuclear power and politics go hand in hand. We saw major issues in supplying Gas to Europe in the recent past when some Balkan states did not appreciate the price being paid to them by Russia to supply gas through their countries to Europe. It took a year for this to be sorted out. Nuclear power stations take any where from two years to 10 years to construct, this leads to a demand increasing very gradually.
While Europe and the US are currently going through a recession, China and India have a completely different set of problems. Both China and India have a exponentially growing middle class who are demanding basic amenities such as water and electricity and other goods that all require electricity to manufacture. While China and India are concerned about export demand they are equally concerned with domestic consumption.
In countries such as India and China, water is a major issue. The production of electricity in these countries contradicts the supply of water to people. The Indus valley and similar one in China have dams constructed in as many places as it is possible. Almost every small town and village have small man made lakes constructed to help with the supply of water for the farms in the area. The reason these are required is because the government is not in a position to provide supply lines at a national level to cope with the demand and rainfall is seasonal.
Since India is already at peak dam construction for the supply of electricity, and there are massive shortfalls, it is logical to assume that they require to have an alternative plan. Countries such as China, India and Korea are accelerating their development of Nuclear power, this may reduce the time line eventually, alternatively paying close attention to the contract and spot prices of Uranium may give us an indication to the possibility of rising demand.
India and China both have a similar situation with one key difference in that while India is the biggest democracy in the world, China is not run on a democratic political system. While in India the progress is based around action, reaction and interaction, China is dominated by a central government that makes all the key decisions. This allows decisions for them (right or wrong) to be made more quickly. Despite this difference both countries are acutely aware of the demand and requirement of electricity both for their industries and their domestic use. Recent power cuts in India made it acutely aware of how bad the situation is there. Recently India stated that they too are looking for deposits in other countries.
When Fukushima occurred, China had a knee jerk reaction much like any of the other countries involved in the production of electricity through Nuclear power. However once cool rational set in most countries have decided to go back to continue construction as the pressure of demand began to take precedence over ideas of safety that were already in place. The issues of water and power once more took priority. China recently purchased the Husab deposit in Namibia.
During the same time that countries were considering whether to continue with construction, uranium mid cap and exploration companies were beginning to feel the pressure from the news and the possibility of the Nuclear renaissance dissipating even before its bud began to show above the ground. By 2012 a number of companies exploring for new deposits had begun to reduce their drilling and expenditure as investors began to dwindle. It is difficult to analyze such companies as their financial position becomes more and more desperate. Some of these exploration companies do have large deposits. Some have pure uranium deposits while others have multiple mineral deposits.
These companies have now become increasingly venerable not only to large mining companies but also to countries such as China and India who do not want to be dependent on other countries for their supply as they will likely use leverage in one format or another before deals are completed. As a consequence China is aggressively pursuing deposits through Hong Kong registered companies and their power supply companies. These companies with the blessing of the central government in China are rapidly moving into Africa concentrating on critically required minerals such as copper, nickel, oil, Uranium and rare earths. Exploration is down while perceived demand looks to gain momentum.
This scenario has placed the Uranium investment sector in a very unique position. There are probably ten companies both producers and explorers out there who will make a major impact on the supply of Uranium. These are the first companies that will either buy out, taken over, or be merged. They will also be the first companies that will move up quickly in price if the obvious solution of nuclear power will become critical.
In terms of bubbles I believe that this will be a slow but strong growing bubble that may continue to grow for decades. It will in time be considered one of the largest bubbles in modern times. The politics of various countries will keep this bubble in check and this will only bring more stability as well as create a very strong foundation moving forward. For companies that have deposits where the cost per pound of uranium is less than 30 dollars per pound will be the first ones to gain strength. If a shortfall occurs we should expect prices to spike back to at least the level of pre Fukushima period. Others with more costly deposits will have to wait for the price of Uranium to strike above 80-100 dollars before making an impact.
While a lot of investors are looking at only companies based in the USA, they should consider Canadian and Australian based companies too. Companies without confirmed deposits of less than a hundred million pounds of economical deposits should be ignored for the time being. Concentrate on the producers as they have dropped so heavily there is very little downside to many of them. It is possible that uranium production will be able to contend with the shortage, but it will take time and it is during this time that investors, contrarians, trend followers and market makers will make an enormous amount of money.
The water issue does not simply affect China and India, but the entire Middle East which requires a huge amount of energy to power their desalination plants. Africa too requires water despite having one of the largest rivers in terms of volume of water there. Mismanagement of resources and finance has led them to their present situation. In the future our energy needs only grow further and Nuclear will have to play a key role as part of the solution, unless a very efficient and cost effective alternative is found soon. We may let our fears affect our decisions but it is likely that Uranium prices will have to increase simply because the fundamentals for it are getting stronger.
Eventually it will be the fear of shortages in energy that will force the acceptance of Nuclear power and it will be greed that will force the mainstream investors back into the Uranium markets. When they do they will have a criteria which includes the price having achieved above certain levels before an entry is made. At present most producers are well below these levels and so provide a three step profit potential. First when the stock begins to move from where they are now and the second when the institutions get involved, finally when everyone else realizes that the bull market for Uranium is already in progress.
There are very few companies out there that are mining only Uranium. Most of them are under 3 dollars per share. The last six years have sieved most of the "wannabes" and left us with the really strong companies venerable to take over. Many of the exploration companies that were priced in around 5 dollars per share are now mere pennies. If you are looking for an opportunity to invest in a potential bull commodity you could be looking at uranium becoming one of biggest of them. The sentiment is changing and interest is moving a gear up in Uranium. The best of these for safety would be Cameco (CCJ).
Cameco is not only increasing production on its current deposits but its also buying out deposits from other companies. The latest was a deal with BHP Billiton (NYSE:BHP). It will increase its production of uranium by opening Cigar lake.
If you are looking for a safe way to enter the Uranium sector this would be your entry point. Cameco not only mines uranium but is also involved in the processing and use of uranium. Cameco is almost at its near yearly lows, this may be an ideal time to get in.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.