As we said last week, we can observe an increasing number of encouraging signs in the precious metals complex.
First, the price of gold keeps on consolidating. It is not eager to rally, but it surely is refusing to break down. The gold chart shows a friendly consolidation pattern.
Second, the mainstream media has given up on the metals. The precious metals are quasi non-existing which is the perfect setup for the start of a new bull market.
Third, a “catharsis” is ongoing in the precious metals mining sector.
Our expectation is that 2015 will be a year of continued consolidation with a possibility of a false break down to scare off the last gold bulls.
We believe this is very important information for uranium. Why? What is the link between precious metals miners and the uranium space?
The simple rule of thumb is that precious metals and uranium miners are highly correlated. The next chart shows the GDX ETF which is a proxy for the gold mining sector (yellow line) and the URA ETF which represents the uranium mining space (green line).
There are some truly interesing observations, the most obvious one being the correlation between both indexes.
Next to that, note how the rate of decline is slowing down. The first three years of the decline (2011 till mid-2013) were very sharp while the relative decline since December 2013 is limited. This surely is an encouraging development for resource investors.
Also, the consolidation period since the end of 2013 has a duration of 1.5 year. That is quite a long time for a non-trending market. What we know from history is that the longer a consolidation goes on, the sharper the move afterwards.
Does it mean that uranium is about to start trending in the short term? We do not believe so, although the possibility for a sharp (short lived) rally is very high. During a consolidation period, there is a fair chance that rallies are sold, so investors should take that into account when opening new positions.
Rick Rule, the king of resource investing, said in one of his recent interviews on SprottGlobal.com that he expected a rally in the uranium space but it “has been postponed“:
“A year ago, the Japanese were paying between $15 to $20 per million Btu (British Thermal Unit). Now they’re paying around $8 or $9 per million Btu. So the pressure is off for the restart of their nuclear power plants. The recovery that I saw for uranium prices, which I believed could go from the low $40s to high $60s, has been postponed.
If the world economy revives, if Japanese manufacturing revives, and if electrical demand revives, then the Japanese will have to restart their nuclear capacity. For now, the low prices for liquefied natural gas serve as a depressant for uranium demand.”
So there you have it. The technical setup in uranium looks good, notwithstanding potential false breakdowns.The fundamental picture is all about a pickup in uranium demand which could come as a result of stronger economic demand and/or higher energy prices. When one of those two criteria would be triggered, the technical consolidation will provide the perfect mix for a new uptrend.
Although our long term view on uranium is positive, we believe it could still take a before till prices move structurally higher. Energy prices are low (so the opportunity cost of uranium high at this point), the dollar has been putting pressure on the commodity complex, and demand in Japan is not picking up yet.
Empirical evidence learns that investors should not try to anticipate future moves, but should rather wait for sufficient confirmation out of the market before taking new positions. Until then, the key challenge is to find the best miners, with excellent management teams, promising projects in safe jurisdictions, with sufficient cash and no debt. Those select miners should be on your watchlist. Are you confident the top miners are on your watchlist?