Happy Days

fire in the middle of the city during night time

Our resolve can wear down a lot after a couple of months of being hammered in the market. Choppy action for months can be harder than a steady grind down. You get your hopes up that the sector is decoupling from the general market just to get the rug pulled out from under you.

It is hard to see that equity prices go towards, or below, prices the equities were at a year ago. Getting closer, or below, your entry price is even worse. When you are up by a lot you are playing with the house money. It does not give that much consolation that commodity stocks are performing a lot better than the overvalued tech stocks or the other overvalued sectors. The only thing that matters is that we do not lose money. If you give it all back, you get angry at yourself that you did not take some of it off the table.

Still, keeping things in perspective is very important. Yes, a recession, or a several year long depression is a possibility. In that case a lot of wealth will be wiped out in the world, but we will still need food and energy to survive. I do not believe that uranium and other essential commodities will fall as much as many of the speculative options out there. (We do however see the uranium sector has outsized beta to the up- and downside again and again). If they do, I believe they will bounce quicker. Why? Because they are essential for our way of living. Most of the speculative cryptocurrencies and tech companies (with unproven business models) can not proclaim the same place in the Maslow hierarchy. Well funded companies with great management in a sector essential for the world energy supply will survive. Compared to other investments many commodities have few to no substitutes, and many of them also have very inelastic price demand. Demand can go down a certain amount during a recession, but if the commodity already is in a major supply deficit, there is a bigger margin of safety compared to other investments. You still have to pick the right companies. (Picking the wrong one, who has to do a capital raise at the worst possible time, can be the difference between bad and spectacular returns).

With hindsight on the last couple of years, I would maybe have been a little less aggressive and been more patient with putting on my positions. Lobo Tiggre, the Independent Speculator, is someone I want to emulate more. The markets have time and again given us great buying opportunities. I am however not changing my overall strategy. As with diets or fitness programs, the best strategy is the one you are able to follow. What helps a lot for me is having a job with a cash flow coming in every month. I have diversified some of my new funds into the oil sector, but I am still buying uranium. If we continue lower, I will have some money ready to take advantage of it.

Getting on the offensive

One of my older posts “The Big Commodity Short” has been shared this week. I think that most of it is still on point. If I could have made one change for my own part, I might have invested more in the oil and gas sector that has been on a tear the last year. Still, I think that I also may have dodged a bullet. The cheapest and most undervalued oil and gas equities were in Russia. When I wrote this piece we knew that rising commodity prices would lead to higher prices on other products. That this again would put pressure on the central bank banks to curb runaway prices was a given.The question is still if the central banks will continue to increase rates and cause a major recession.

One should not be in the situation where you doubt the thesis every time the market is going down. The markets do not move up or down in a straight line. I see proof almost every week that the thesis is unfolding:

On Thursday June 16th Borja (@piterloskot82) reported that CGN (China General Nuclear) and CGNPC (China General Nuclear Power Corporation) have entered into a new sales framework agreement for three years between 2023 and 2025 for 3.12 million pounds per year. The interesting part was that 40% of the contract was fixed at $61.78/lb multiplied by an inflation multiplier, but the majority (60%) of the contract was linked to the spot price:

I have two takeaways from this contract: The first one is that the fixed part of the contract is way higher than the spot price at the moment ($61.78/lb versus $46.98/lb). The second part is that CGN has the majority of the contract linked to the spot price at the future delivery date. CGN would not have 60% linked to the spot price if they did not think it would be a lot higher than $61.78 during the contract period 2023-2025.

We also got the news that Global Atomic has received a Letter of Intent from a major North American utility to produce 2.1 million pounds of uranium from 2025 to 2030. Utilities are looking for pounds outside the major producers with developers to diversify supply. (Previously we have seen companies like Encore Energy contracting pounds for delivery in 2023). We did not see a lot of this before 2021. Focusing on just the general markets and the spot price of uranium going down (while SPUT is getting stink bids filled) becomes very myopic with this backdrop.

The challenge now is to get on the offensive. When looking back at the time we are now five years in the future, what do you think will be the best decision you can make today? Do you believe this is a buying opportunity or should we abandon ship and wait for better times? I am looking for more cash to deploy more steadily, but I will try to be a bit patient the next couple of months.

Why do I still own gold and silver?

white and gray bird on the bag of brown and black pig swimming on the beach during daytime

The majority of my articles are about uranium. My second biggest position is, even if I do not write a lot about it, in physical precious metals and the miners. Owning precious metals after August 2020 has been frustrating to say the least. Why do I still hold these positions when they are underperforming?

To defend an allocation to the physical gold and silver positions, we have to understand that all investments are not for maximizing the upside. Our allocation to physical should be considered more of an insurance. Something you only want for protection against a negative event like a currency devaluation. (The situation in Venezuela comes to mind). Investments in the miners are more for speculation and participating in the upside.

Inflation protection

Many people own precious metals as a hedge against inflation. In that environment, veteran investors will be quick to tell you that investments in energy and other commodities perform even better than precious metals. (A good reason to hold uranium, oil and other commodities).

The other benefit you get by owning precious metals is for diversification, and that it still performs in a deflationary environment. Let us compare the S&P 500 to the performance of gold during the financial crisis of 2008.

Gold during the 2008 Financial Crisis

During the 2008 financial crisis the stock market fell by more than 50% after the housing bubble popped.

From the top og $1549 in October 2007 it took about 16 months before the S&P 500 bottomed out at $735 in February 2009, down 52,5% from the 2007 top. From there, it would take another 49 months before the S&P 500 got back to break even in March 2013. In total, the S&P 500 spent more than 5 years underwater before it managed to get back above its 2007 highs.

The price of gold during the same time told a completely different story. From the S&P 500 top in October 2007, to the bottom in February 2007, gold went up 27%. By the time the S&P 500 was back at break even in March 2013, gold had gone up by more than 120%.

This is not an example to show how much you could have made if you rode the gold bull market perfectly. This is how part of your portfolio could have performed (not inflation adjusted) during the time of the financial crisis if you were diversified into physical gold. Owning an asset that protects you like this can make a big difference if you want to protect your wealth.

Caveat – Gold stocks are still stocks

It is important to emphasize that physical gold performed well as a hedge, not gold mining stocks. The gold stocks performed very similarly to the general stock market, they just fell even more. (On the positive side, they bottomed out and got back to break even earlier than the general market). Gold stocks were not a good hedge during the financial crisis.

What I am doing

Markets do not move when we want them to. I have a position in physical gold and silver for protection, and in the miners for upside. (I look to add to this, and to my cash position in 2022). Many talk about scaling out of some of their commodity positions, and into gold and silver miners later. I do not know if the market will be there for them when that time comes. I therefore have some exposure to gold and silver at all times.

My portfolio is a mix of physical and Sprott’s gold or silver trusts. In addition I own some miners. For miners the big ETFs are where most of the funds have gone. I also have some select companies who have jockeys with a track record for making money for their shareholders. (Rick Rule has mentioned some of these jockeys in earlier interviews). Like everything else, you can get these companies at reasonable valuations if you buy them during weakness in the market.

Silver: Do we want to have a free market or do we want shortages?

I am back with my tinfoil hat to write a bit more on the silver market. Doombergs recent article on the copper and oil markets have put things into a bigger perspective for me. In addition I have relied on the work of Nate Fisher and Ronan Manly on the silver market.

Oil

I will start with referencing Doombergs 25. October 2021 article “Doctor Copper Is Sick“ where they started with explaining what happened in April 2020 when the oil price traded negative $37.63 a barrel:

«The front-month May 2020 West Texas Intermediate (WTI) for delivery in Cushing, Oklahoma is the contract that traded negative and – critically – the Chicago Mercantile Exchange (CME) allowed it to happen.»

«Whatever you might think about the CME’s decision, few doubt the sanctity of that market now. Participants understood the rules, the rules didn’t change, a clearing price was found, and life went on. Production of oil was curtailed, creative storage solutions were implemented, prices recovered, and excess inventory was worked off in an orderly fashion as the economy rebounded.»
Doomberg

In this case long traders were punished because they did not have a place to take delivery of the oil they had purchased. For anyone who believes in capitalism, this is how you do it. You do not interfere with the price or change the rules. Price is the market clearing mechanism. Everyone in the market knows the rules already, and you do not change them when some of the participants are in trouble. The market was allowed to find a market clearing price at negative $37.63 a barrel, and this was reached without outside interference.

Copper

On the The London Metal Exchange (LME) however, the price was not allowed to find a clearing price in the copper market:

«somebody was caught naked short and could not make delivery. They collected money from another trader at some point in the past on the promise that they would have copper to give them, but when the time came, they couldn’t make good on their contractual obligations.»
Doomberg

Market participants have to know the rules in the market they operate in. If a naked short sees the price of copper goes up, they have to run around to sellers of physical copper to buy from them. If they can’t find anyone to sell them copper, they can’t deliver on their obligations. (To use GameStop as an example: the short sellers were forced to buy back the shares they were short at prices way above what they had already sold). Those are the rules, and they have not changed. This led the copper price at the short end of the curve to go vertical.

LME interfered and allowed participants with short positions to avoid delivery. The rules were changed. People who have followed the commodities markets have expected copper going up with increased demand, and have taken long positions in anticipation of this. (As we saw in the oil market, being long is not without its risks). Interference to protect short sellers does damage to the market. Inventories of copper were low because supply could not keep up with demand. Increased demand for a product is not manipulation.

«the LME damaged its credibility in the marketplace. It either facilitates price discovery and thereby serves a useful purpose, or it doesn’t. Apparently, it doesn’t.»
Doomberg

The positive take away from the oil and copper market is at least that it is communicated to the market. Many find it is a lot worse in the silver market.

Silver

Moving on to silver I will follow the example of Nate Fisher and make the disclaimer that everything I write about the silver market are allegations only.

I am using the articles “The Great Silver Conspiracy – should we have hit $50 silver in February? Yup.” by Nate Fisher and “LBMA misleads Silver Market with False Claims about Record Silver Stocks” by Ronan Manly as my reference.

They are very thorough articles so I hope you will read them for reference. I am doing the cliff notes version here:

Starting at $24.85 on 28. January, the price of silver spiked up. Silver was going into the weekend 30. and 31. January at about $27.00. Over the weekend there were massive retail raids of physical silver all over the world, and several sellers sold out their inventory. This had the effect that retail sellers would have to source new inventory. Into Monday 1. February the price of silver went up even more, and hit $30 before ending the day at about $29. A massive move in a short amount of time. The next day on 2. February the paper price on silver was smashed down over $3.50. – This was at a time where there was massive physical interest with retail silver selling out, and money was pouring into vehicles like the SLV and PSLV.

The reason for people buying SLV and PSLV was simple:

(this) “led many of us to buy SLV or SLV call options expecting the float in the LBMA warehouses to be exhausted and force SLV to go to the open spot market to buy silver at increasing prices. Potentially hundreds of millions of ounces would need to be sourced, and it led investors to believe that the price of SLV would thus go sky high.“

“Now, with SLV, investors at the time were led to believe that if they bought shares in SLV, that SLV would then add the appropriate ounces to the trust.“
Nate Fisher

Over a three trading days period between 29. February and 3. February SLV claimed to have sourced a massive 118 Moz, and barely moved the paper prize of silver in the process. (With a yearly consumption of 1,000 Moz, a three day shock of more than 10% of this is huge). People who did not believe this were asked to take off our tinfoil hats.

“However, it appears that somewhere around February 1st, SLV changed their prospectus to suggest that “not all of the silver is there.”
Nate Fisher

What a coincidence. A fund that at one time had in their prospectus that they had fully allocated to silver, suddenly changed to say it might not be all there.

Later, in April when they closed the books for March, someone found a 110 Moz accounting error in “one of the LBMA vaults”. (Tinfoil hat back on).

«In short, instead of silver holdings in LBMA vaults having risen by 3,863 tonnes (or 11%) in March, the new LBMA claim is that the silver inventories rose by 561 tonnes (or 1.6%). Which is 6.88 times less.
Instead of a 124.2 million oz increase, the increase was 18 million, a difference of a massive 106.1 million ozs. Instead of record silver holdings in London, there was no record. Therefore, the folks at the Guinness Book of Records are not needed. The record still belongs to March 2020, when 1.175 million ozs of silver was claimed by the LBMA to be stored in London.»
Ronan Manly

There are a lot more factors in play here, but I suggest you read the two articles I have linked on the subject. In short what happened was the following:

SLV misled investors to think they had added 118 Moz of silver, and they did not. (If they had gone out into the spot market to buy these 118 Moz, the silver price would have moved significantly, and sharply higher. In turn, this much higher price would have attracted even more buyers and speculators – driving the price even higher. Silver and many commodities act like a Giffen good: A good that people consume more of as the price rises). Furthermore, SLV changed their prospectus during this time, before they months later discovered the accounting error.

I can attest to, as a person who works in accounting, and has reporting every month, that in even smaller companies you will have some quality control over what you report. If there is a big change month over month in a reported number, it will always be investigated, verified and commented on. «I see we have a 10% increase in inventory this month. What is the reason for this?» Is something that will be asked in situations like this. Especially if holding bullion is your main business. The responsible for purchasing and logistics then have to confirm it. People make the entries, and we always have to double check for human error.

The only thing I am unsure of in this case is what price we could have seen in February. Could it have hit $50? One can never know how things would have played out without interference. I am sure that when price was not allowed to spike up, and find willing sellers, we have just kicked the can down the road. The market has not been given price signals to increase production, and companies like First Majestic are holding back part of their production. People around the world are seeing rising prices. Those who have read up on history are buying real assets, cryptocurrencies, commodities and precious metals. I am sure we will see situations later where we will have a similar run on silver, and there will not be enough to go around. The playing card with “accounting error” will not be possible to use again. Silver investors have also learned not to use vehicles like SLV, and will only buy physical or use PSLV that actually stack silver for their customers.

The inflation of silver

I have not written about silver (and gold) for a while, and there’s no secret why. Even with the #silversqueeze movement early 2021 the price has still not moved anywhere. However, the lack of interest in the sector only increases my conviction long term.

Gold and silver are my most frustrating investments, at least so far. The interest rates go up, precious metals go down. Interest rates get pushed down, no response from the precious metals. (Don’t get me started on the money supply). This is an exhausting situation, and I think many have given up on the sector. I am stubborn, and have been in a similar situation with uranium, so I still hold my position. (If I had started with investing in uranium earlier, maybe 2017, I would maybe be fed up by the start of 2020. Right at the beginning of the turn for the sector). A year of underperformance or flatlining can turn around very quickly.

Gold and silver trade very similarly, but with my risk tolerance, I follow silver more closely. Silver also has the more interesting demand structure with about 50% from retail and 50% from industrial.

Why are we here

As in many other commodities I think investors do not believe in it after several years. We are in a “The boy who cried wolf” situation. We even had the #silversqueeze this Winter and retail trying to drain the COMEX. (COMEX is the primary futures and options market for trading metals such as gold and silver. However, they mainly offer paper contracts, and do not want customers to stand for delivery. Their physical supply is more what you see at a car dealership showroom. They do not have that many cars parked outside). With the massive buying of physical silver, both from coin dealers and through the PSLV (Sprott Physical Silver Trust) we had a spike up in the paper contract price over $28, but it was soon pushed down again. Still, the movement continued to stack silver and buy PSLV for months afterwards. It is therefore frustrating for many to see the silver price is trading lower than it did a year ago.

The big inflation of silver

The reason why the price of silver is trading lower is the inflation we have in silver supply. (In this case I am talking about “paper silver”). With so many paper contracts for silver, the amount of “silver” in the market gives the market an image of oversupply. If you have an oversupply of a product the price usually moves down. Very few of the paper contracts are expected to be held for delivery. Some people are talking about a 500:1 ratio for paper to physical silver. In the midst of February 2021, when the #silversqueeze frenzy was at its highest, you suddenly saw a tremendous supply of paper silver being sold in the market. The silver market seems to be trapped in a situation where the paper contracts decide the price, and not the supply demand of the physical silver.

The supply and demand we see for physical silver

Production of silver is falling, and according to First Majestic Silver, mines produce about 800 Moz a year. Annual consumption of silver is about 1.0 Boz. The 20% that is not covered by mining comes from recycling and above ground supplies. How big these above ground supplies are is difficult to estimate. No one really knows. (We have a similar situation with estimating above ground mobile inventories of uranium).

57% of silver consumption is from industrial applications. We are talking electronics, medicine, solar, water purification, window manufacturing, etc. (Silver used to be in high demand due to its application in photography, before digital cameras became widely available. Industrial use of silver fell due to the transition to digital photography. This slack has now been picked up by demand from photovoltaics (solar panels) and EVs).

The remaining 43% demand comes from coins and bars who absorb 22%, jewelry with 17%, and silverwarewith 4%. With the #silversqueeze movement this year, the demand for coins and bars have been a lot higher than normal.

Why do you invest when the market is rigged?

At the moment, financial players are able to control the market, but I do believe that one day we will see an end to this silver manipulation. If silver had 100% industrial demand there would be more held for delivery. (The retail demand for coins and bars we are seeing now, is trying to force the same effect). The more people try to force delivery of actual silver, the less paper silver will be able to dictate the price.

In the Palladium sector they had a situation we hope will repeat with the silver sector. (The key commercial use for Palladium is as a critical component in catalytic converters – a part of a car’s exhaust system that controls emissions). Palladium had a futures market that broke down because strong physical demand broke the short interest players.

Sprottmoney had the following explanation for the price going vertical from $1,600 to $2,600 in just a few months in 2018: “After a rally from January 2016 to January 2018 of over 150%, or $682, Palladium fell just 28%, or $318. Then it took off again, and as we know now, after a vain attempt to cap the price they decided to give up this time and not risk being even more record short this time around. They realized that paper futures no longer had the same effect on the price of the underlying commodity anymore and did not want to risk being caught massively short as the price continued to soar higher.“

The increasing demand for the physical product, together with a high short interest in the futures market, made the massive price increase possible. The longer the price is kept down, the more energy is stored. This is the reason why I am not letting my eyes off silver. If $21 is the floor for silver, or we might have to go lower remains to be seen. I am keeping my silver position and hope to get rewarded in the long term.

Volatility

I have already compared the uranium sector to a roller coaster. Today I will expand on that a bit more. The peaks and valleys you will have to go through will only increase with the higher valuations. You therefore have to be prepared for it.

It is not easy to hold on to uranium positions in a bull market. (I have used a graph for Global Atomic for illustration, but the story is similar for most of the companies in the sector). Since mid June 2021 we’ve had a two months long correction that lasted till the end of August. Most of the companies went down 25% or more during this time. When we reached the second bottom in August, the sentiment was close to rock bottom. Most people knew that Sprott was coming during these months, but towards the end several were doubting that it would have an effect on the spot market. This however quickly turned with SPUT launching their ATM on 17. August. We saw the spot price going up from about $30 to $50 inside one month. Many of the companies doubled during this time. Suddenly investing in uranium was considered a sure bet. Just buy SPUT and count your gains. We went from one extreme to the next.

This did not last long. When sentiment did not seem it could get any more positive, we got the news from China that the real estate giant Evergrande may become the Lehman Brothers equivalent for the markets in 2021. Several uranium companies then corrected down by more than 25% within two to three trading days. These moves up and down within a month can make the most veteran of investors nauseous.

A question for many is, how should you deal with this? Should you sell down and diversify your portfolio? I can share some thoughts I have made on my own portfolio allocation.

Value, volatility and allocation of positions

From 1. August 2020 the value of my portfolio has gone up almost 3X. (I picked August 2020 because the value of my uranium portfolio was still reasonably low then). The increase of almost 3x is partly from new money invested, but mainly from returns on the existing uranium positions.

At 1. August 2020 my allocation to uranium was just over 60% with gold, silver and other investments amounting to the last 40%.

As of september 2021, my allocation to uranium has gone up the most because it has had the best returns. Uranium is the most volatile of the sectors I am invested in. For my portfolio this means that for any given day, the volatility is now expected to be higher than it was in 2020. I have allocated funds to other positions, but my uranium positions have grown a lot more than my new ones. The volatility in my portfolio is therefore mainly uranium.

From the June top, my portfolio value was down about 27% of its June value when it had its first bottom in July. After a failed recovery, it dipped again in August. At the beginning of September we went vertical with SPUT purchases, and the portfolio recovered its losses and went up to about 30% above its June value in just a couple of weeks. (From the bottom in July the value was up almost 78%). After the latest week of fear in the market I am now down to 5 % above the June high, or about 18% down from September the top. The difference from the June top is the sums are a lot higher, and it feels worse to loose the higher amounts. Other, less volatile sectors can take a year to make any of these moves we have had the last couple of months.

You can compare holding your uranium positions through a bull market to raising a tiger. At the beginning it is not that big and scary, and it is still relatively easy to control. When it is fully grown, you risk losing your arm if you are not careful.

I will take my initial position off at some time to reduce the risk, but we are not there yet.

Uranium chugging along

This week we have seen SPUT is continuing to drain the spot market. Kazatomprom is in talks to supply both SPUT outside the spot market, and Chinese stockpiles. Today I will have a shorter update, and my focus will mainly be on the action in the market on Friday. I also share some of my thoughts for new investments going forward.

Uranium

Friday was a very interesting day. I hope that everyone that has entered into the uranium sector has been aware that these daily moves are both possible and normal. Volatility is the name of the game, and it cuts both ways. There can be several reasons why the companies, on average, lost 10% on Friday:

The situation in China with Evergrande Group and their creditworthiness we are seeing going down. This is scaring the general market who is afraid of contagion. A lot of people remember the housing market in the US was the first domino to fall in the 2007-2008 financial crisis. If not a full blown crisis, people might just be afraid of a correction. That however usually means a run to the dollar. With the uranium sector having a high beta, the moves down in the general market is amplified among the uranium companies.
We can also have traders who look at $50 as a resistance level that could give a pullback and have traded this level. The market is made up of several different players who play a different game than you and me.
Friday was also the date for option expiry for a lot of the companies. Before Friday a lot of these options were in the money, but with a 10% correction a lot of these expired worthless. I have not seen any numbers to see how big of an impact this correction had, but I would not find it surprising to see these kinds of moves.
Some investors in the uranium sector can have $50 dollars as their first sell target for their first tranche of selling. If enough big players sold down a portion of their holdings, this could affect the market. (I think the marginal cost of producers is more around $60-70, and is where a functioning market could find its equilibrium).
We’ve had several tweets shared about utilities that have three years worth of uranium. This can make the utilities wait longer for contracts than we think, and ride this price spike out. I do not think that three years sounds that long. We have the ramp up times for existing (and new) mines that can take years, and the time for the fuel cycle is not that quick too. John Borshoff of Deep Yellow, says that there are many teams that lack the skills to start up and run a uranium mine. He thinks the ramp up speed is way too optimistic for most of the aspiring producers in the sector.
We have the existing producers (Kazatomprom and Cameco) who do not want a spike in price. This could lead to overproduction, followed by a sharp decline in price, with the price settling down in the 20-30s again. I believe we can have a spike and a drop, but going back to the 20s again would mean all the utilities have topped up inventories again as they had before Fukushima. They had been contracting over 100% of their yearly consumption for years by that time. I do not think that Kazatomprom and Cameco will be able to cap the price at around $60 now. In 2019, before the supply disruptions by Covid-19, and before SPUT was launched in 2021, I think they could have been successful. Now that the financial players on Wall Street are smelling blood, it’s a whole other game. Wall Street now has a vehicle where they can move the spot market.

When I take the numbers from UxC (that Kazatomprom has been using) for utility term volume (over a simplified assumption of 180 million pounds consumption/demand per year), I get a graph very close to the one Sachem Cove Partners have been using in their presentations. The years with 40% contracting led to several years with over 100% contracting. Several years of contracting at this higher level had to pass before the price could drop from oversupply of the market.

Barring a bigger correction or financial crisis, I do not see much stopping the Sprott Physical Uranium Trust from continuing to push the uranium spot price past $60 the next couple of weeks. The uranium equities can however correct 50% at any time, and still be in a bull market. This volatility is something you have to live with if you want to hold them.

Other commodities

I have to admit that I am looking a lot at other commodities than uranium at the moment. My allocation, and the appreciation, of the sector has made my uranium holdings very large. (The picture was totally different during the Summer of 2020. My uranium holdings were a fraction of what they are now, and their performance made me pinch my nose when I bought more). I do not have that feeling anymore and I am looking to precious metals that have had a horrible year. Copper and tin are also sectors I want to get a better exposure.

Commodity companies are not buy and hold investments, and the different sectors will have different peaks. I know some think they can surf one wave perfectly and then hit the next one. I doubt that I will be able to do that. I therefore want to average into some other commodities going forward. I have to preface this with the fact that I have tried to do this before, and I have most of the time ended up just increasing my positions in uranium.

An eventful week in uranium

space grey ipad air with graph on brown wooden table

I do not think I am alone in looking back at a great week of investing. From the activity on Twitter it seems many have had a hard time concentrating on their work with the spot moves we’ve had in uranium. I am happy that the Australian market is closed before I start work, and the US and Canadian market opens just as my workday ends. It looks like the games have begun.

The depth of the uranium spot market

We have seen much discussion back and forth the last year about the depth of the uranium spot market. In an interview with Smithweekly, Mike Alkin from Sachem Cove Partners said “With a couple of hundred million dollars they can create their own reality in this sector.” (In this setting he referred to the financial players). I have been in the camp believing Mike Alkin and Timothy Chilleri in this, but there have been people taking a different view. They have been saying we would have seen a move in the spot price already if that was the case.

Some people reacted to the euphoric atmosphere on Twitter the last couple of days, saying that sentiment is too positive. First of all you have to consider we just went through a 30% drawdown in July and August. Secondly I would say that it was mainly a cry of relief that a key component of our investment hypothesis seems to be correct: The available supply in the spot is very low. There is above ground inventory but it is not readily for sale, or at least not at these price levels. As Brandon Munro also has commented: when sellers see that spot is increasing, it actually reduces available supply. This is because the sellers see they probably can get a higher price in the future.

With the $39.00/lb spot price in uranium at Friday’s close, the entry of the Sprott Uranium Trust ATM funding has led to a $8.70 increase from $30.30 on 17. August. That is a 28.7% increase in the uranium price.

I think that we were really close at moving the spot price up to today’s levels during the Spring. This was when the developers were buying uranium. Many of them, however, bought pounds several months into the future and did not really challenge the near term spot supply. If we had seen more purchasing with 30 day delivery, I think we could have seen a similar situation to the one we are seeing now.

What I believe we have seen the last couple of weeks is that most of the readily available supply has been removed. Up until now, a couple of traders have (at least in theory) been able to keep the price at or under $30 by selling the same pounds back and forth among themselves. The buyers in the market want to get the best price. Utilities, and producers like Cameco, have been buying in volumes, and with delivery further into the future, so they do not move the price. When production at Cigar Lake halted in 2020 because of Covid-19, we saw the spot price increase by a lot during a short timespan. This was because Cameco had to secure pounds to deliver on their contracts. Securing supply for delivery was more important than waiting for better offers.

As for some of the profit taking and selling on Friday. People sell out of their positions for many reasons. Many investors reached their objectives and have taken money off the table. (If you want to exit a position you would rather do it when there are many buyers and the interest is high). These sellers might enter later when the spot price goes over $40. In bull markets we have to climb a wall of worry. At every resistance level there are participants that expect the trend to turn downward and sell down their positions. I expect a lot of people, new and old, jumping in when we get above $40.

Can SPUT be stopped?

There are some people who are discussing if SPUT can be stopped legally, with them cornering the market for spot uranium as they are doing now. We have the example with the Hunt Brothers in the silver market who were forced to sell their silver position in 1980. At the time silver was going parabolic. (We have still not made a new all time high in silver since then). Concerns about government intervention is therefore something all of us should consider.

I love using anecdotes from when I was a child, I will therefore share one with you here: When I was about five years old my brother and sister entered into a drawing competition in the local newspaper. After a couple of weeks they both received a participation trophy in the form of a calendar. I became jealous and I cried to my dad and asked him to contact the organizers. He called them and asked them to find my picture, but they could find any. My dad then had to explain to me that they could not send a trophy when I had not participated. Nothing is stopping utilities or producers from entering the market and bidding for the pounds themselves.

Kevin Bambrough says that most people won’t even blink an eye under $150/lb and I agree with him there. It is never too early to consider it, but we should not sell or worry at all under $40/lb. We are still under the all in sustaining cost for most producers, very early in the game. John Quakes does not see why or how the US government could intervene to try to stop a Canadian based company issuing shares and raising cash in Canada to purchase a commodity in the market.

In closing I just have to say we are looking at exciting times ahead. I have no idea how far we will go. My positions in uranium are already doing better than any of my investments up until now.

Conspiracy Theories

Conspiracy theories have a long and exciting history. Throughout history we have seen conspiracies to take over land, acquire power, wealth and influence by many. We also have theories about whether many of the events back in time are in fact as history says. We often call this conspiracy theories.

There is actually an anecdote about the term “conspiracy theory”. It is only in recent decades that the term has been given the somewhat derogatory term it has today. It is therefore only fitting that there is even a conspiracy theory about the origin of the term “conspiracy theory”. The conspiracy theory claims that the CIA invented this term in 1967. They did this to disqualify anyone who questioned the official version of the assassination of John F. Kennedy, and anyone who doubted that Lee Harvey Oswald had acted alone. The extreme version of the theory is that they invented the whole concept of “conspiracy theory”, while the more moderate version is that the CIA made propaganda that gave negative associations to the term.

My favorite conspiracy theory is about director Stanley Kubrick and Moon Landing. The theory is that the film “The Shining” is the director’s admission that he actually directed the moon landing in 1969, and that the United States never went to the moon. (Or at least did not go to the moon in 1969). Since Kubrick had made “2001 a Space Odyssey” in 1968, he was the perfect candidate for the job. The United States could not see itself beaten by the Soviet Union in the space race under any circumstances. The Shining is therefore according to conspiracy theorists, full of hints that Kubrick was the director behind the moon landing. A documentary has even been made about this. «Room 237», which addresses this and several conspiracy theories about the film.

The crown proof most people use is that the character Danny is wearing a sweater with the motif “Apollo 11” on it.

If this conspiracy theory had been true, I would have found it very amusing. I am therefore sad to say that I have seen several documentaries, analyses, and behind-the-scenes footage that unfortunately disprove this theory. Kubrick always used strong symbolism in his films and they can be interpreted in several ways according to what you are looking for. In The Shining it was the costume designer for the film who found the sweater with Apollo 11 as the motif for the character Danny. The costume designer said that she chose the sweater because it looked like it was homemade, and that the family in the film did not have a lot of money. Kubrick had no influence on this other than approving the choice she made.

There are also conspiracy theories that are supported by traditional media. Everything that had to do with suspecting the Wuhan lab was behind the virus was off limits for over a year. The media said it was a conspiracy theory. You would get suspended off Youtube if you got to close with your accusations. Now, the media have suddenly turned and say the lab could have been behind the leaked virus. The bat (and the other explanations) the media gave instead can be seen as a conspiracy theory from them. The media tried to lump everyone who saw the lab leak as a probable explanation together with the flat earthers.

The reason I am giving all these examples is just to encourage you to be more open. Conspiracy theories do not have to be invented by people in their basement with a tin foil hat over their heads. As an investor you will have to look past the headlines, or go beyond what the crowd is doing if you want outsized returns. It is important to be critical of everything you see and read.

Precious Metals

All this preamble for saying that I am open to the possibility that the gold and silver paper markets are manipulated. (What I do not want to speculate on is how far up this conspiracy goes).

What I am comfortable in saying is that paper short sellers are able to manipulate the paper price. They usually sell down hard during the low activity hours of the day when there are few buyers are around. The amount of paper contracts they are selling are several times the real volume exchanged in a year of the physical metal. One would expect higher volumes in a futures market, but I wonder if this was the intention when they started selling the futures contracts.

We experienced a massive demand for silver this Winter/Spring with the Silversqueeze. We saw massive amounts of people who took physical delivery. There were shortages at dealers, premiums were high, but the paper price was “tamped down” because of massive paper selling.

It has been very interesting to observe this. I have never been exposed to a market where the product is sold out, and the price is going down. This is not what I have learned about supply and demand in Economics class. For me this smells like bad fish.

I am following a lot of people for more information on the subject:

Sprott Money with Eric Sprott and Craig @TFMetals Hemke

GoldSilver with Michael Maloney @mike_maloney and Jeff Clark @TheGoldAdvisor

Arcadia Economics and Chris Marcus @ArcadiaEconomic

David Morgan

Wall Street Silver

@natefishpa behind renaissancemen.org

These are just at the top of my head, and there are several others to check out. Most of these have been called tin foil hat conspiracy theorists. In this case, I think it is more a badge of honour than an insult. I can be wrong about this, but it does not hurt to seek out independent information. Both that support, and undermines your hypothesis.

Zero to one

faceless man with decorative shoe playing table game

I made my first substantial money investing in tech. Books like «Zero to One» is a book that was referenced a lot for investing in the tech sector and I really respect Peter Thiel as a thinker. I have found this book can also be applied to commodity investing. One can take knowledge from one place and try it in other sectors.

From my experience the biggest change in valuation a company can have is going from the impossible to the possible. A company that is able to get into production, come successfully out of a restructuring, or strikes gold are events I would put in this category. Things that are already seen as possible for a company will already have a lot of this priced in. Unanswered questions, or impossible situations are not priced in, and people do not know what it is worth.

In Zero to One there are three ways of approaching this:

1. Bet on a contrarian truth

What important truth do very few people agree with you on? Here you have to take a step outside the mainstream consensus. Some examples I have for this in the commodity sector are:

Renewables like solar and wind can’t save the environment alone. We need reliable baseload power. The solution for this is in many cases nuclear.
The electronics industry is experiencing a chip shortage because of increased electronics demand. The tin shortage is the bigger factor, and not production capabilities in the factories that the mainstream media portrays it as.

By betting contrarian here in smaller sectors, one avoids competing one will experience in bigger, more popular sectors.

An important factor to make sure you are correct here is: Is it the right time? If you have seen “2001 a Space Odyssey” they have a version of an iPad in the movie. The movie is from 1968, more than 40 years before the technology and the market was ready for such a thing. You would not want to wait that long for something to materialize.

2. Start by dominating a small market

The book here gives an example of Amazon that started in a small niche market, selling books. They used this as their launching pad for getting into other sectors later.

Also here you can apply this to the commodities market. You will have a better chance with over performing in a niche market like tin, tungsten or uranium than iron ore or coal. But as for every rule there are exceptions. For example, after the big fall in the oil price after 2014, a lot of the workforce had to leave the sector. After investment interest went down in the sector, competition among investors to find the best investments also went down.

3. Strive to be a monopoly

This point is about how you should not compete against other companies. You should be without competition as much as possible. By doing this you prevent the competition from eating away your profits. By doing this companies like Google can focus on improving, and creating new features which the customers will get advantage from.

I do not apply this to the companies by themselves, but more the sector by itself when it comes to commodities investing. The sector has to be the only solution for their customers. There should not be an easy substitute for them.

The uranium sector is the only source of fuel for the nuclear plants. There is no substitute for uranium to keeping them running. That is why, when the circumstances are right, the price utilities have to pay does not matter.

If you want to solder circuit boards you need tin. Tin is the glue metal. Before you could use lead for soldering, but due to regulatory requirements, plus the health and environmental benefits, tin is the only real alternative now.

Conclusion

This is something one must try to do with more than this example. From every aspect of your life you might have something you can transfer to another situation. From football you might have to learn to keep cool under pressure, from long distance running you might learn patience and perseverance. All things you can transfer to the rest of your life and maybe to investing. A lot of great things can happen if you go from zero to one.

The Inflation King

Preserving or increasing my purchasing power has been a big reason why I am investing in commodities. At the moment there is no agreement on what the massive amounts of money printing will lead to. Will we have massive inflation or deflation (or will we have stagflation)? For this week I have focused on the Inflation King.

I love reading about historical figures like the Robber Barons: I’ve read about the Vanderbilts, Rockefellers, Carnegies, Mellons and Morgans. The topic of today is Hugo Stinnes, more famously known as the Inflation King, or “Inflationskönig” in the original German. Most of the information on Hugo Stinnes has been in German, and I did not know that much about this Tycoon before I read the book ”The New Depression” by James Rickards.

If you have grown up in the West and paid attention at school, you know that Germany in the 1920s suffered hyperinflation. This led to a devastating loss of purchasing power for the general population in the country. People lost all their savings they had in the bank, and they had to pay for products with more and more of their currency. There are pictures of people carrying cash in wheelbarrows and kids playing with their useless currency.

The hyperinflation was caused by massive money printing for paying reparations for the First World War from the Treaty of Versailles. The result of this devastating loss of purchasing power for the population. The depression that followed sowed the seed for what came to pass in the 1930s and 1940s.

The reichsmark became worthless. The exchange rate between it and the US dollar went from 208 to 1 in early 1921 to 4.2 trillion in late 1923.

Hugo Stinnes was born in 1870 and was from a prosperous German family who had interests in the coal mining industry. Later Hugo inherited the business, and expanded it by buying more mines and diversifying into shipping, buying cargo lines. He could then use his own vessels to transport the coal. (With John D. Rockefeller making a lot of money on transporting oil, it was probably not a bad idea to be in charge of your own transportation). He also expanded the shipping to include lumber and grains.

Prior to the Weimar hyperinflation, Stinnes borrowed vast sums of money in reichsmarks to make more purchases in the different sectors. (I have not found out if he was just a very big gambler, or if he had read up on the works from the Austrian School or similar). When the hyperinflation hit, the value of coal, steel and the price for shipping retained their value, while the reichsmarks fell in value. (Hugo Stinnes also had investments outside Germany where the currencies had not lost their value on the same scale).

Stinnes was able to repay his debts in worthless reichsmarks from his profits from his investment in commodity production and shipping. The price of the commodity, and the shipping of the products, went up while the debts stayed the same. Stinnes made so much money during the Weimar hyperinflation that his German nickname was ‘Inflationskönig’, which means ‘Inflation King’.

The reason why I bring up the example of Hugo Stinnes is that we have heard mostly about the middle classes being destroyed. If you are prepared you can take advantage of this instead of becoming a victim. Hyperinflation has happened in several places. Three examples are in Hungary, Venezuela and in Zimbabwe. There are cautionary tales throughout history which illustrate the consequences when too much money gets printed.

My takeaway

Writing this I have not run to the bank and borrowed as much as possible to do the same. (However, I did increase my mortgage a bit. I had already paid down a lot on it, and the mortgage is less than two times my yearly salary). I am also using most of my monthly salary to add to my commodity investments. With countries printing trillions of fiat currency with no end in sight, the value of the currencies will go down. The deflationary pressure we have experienced since the 1980 with products imported from low cost countries will not be enough. The price of labor might still be low, but the price of the commodities that go into the products will go up. For commodities we have no new supply coming online at today’s prices.

As for currency default, my home currency is one of the few in the world that is not printing itself into oblivion. I am more worried about the USD than the Norwegian Krone. I have most of my investments outside my home currency in CAD, USD and AUD. I do not expect hyperinflation but a steady devaluation of most currencies and the commodities going up or keeping their value.

Printing new money (stimulus) is far easier for governments than the alternative, which is a full-blown deflation, crashing markets and a subsequent depression. In a depression, prices of everything drops in value and the purchasing power of the currency actually goes up, which encourages savings and hoarding cash. Why buy a car today (if you have the money), when you can buy the car next year for less currency. The thing with inflation is that it hurts people that have been good savers the most.

Inflation is already here. I go by the definition that inflation is an increase of money supply. “Inflation is always and everywhere a monetary phenomenon.” Increasing prices, which we often call inflation, is a result of the inflation. The question is if we will see increasing prices on goods and services. For anyone who has seen the price of copper or lumber, or anything that is not included in the reported CPI, the answer is yes. We get a decline of purchasing power of a given currency over time.

I do not care if you are a Tin Baron or Uranium-, Silver-, or Gold bug. We will all be inflation kings.