I am not making a full post for today. (I have a draft about the change in EU and US utilities contract coverage, but I think that can wait). I just want to come with a reminder that if you invest in a volatile sector you are responsible for your own results.
I had not checked my portfolio performance before today. Watching the value of a portfolio going up or down in real time is very different from seeing it after the fact. If you see something in real time, you are often tempted to do something about it. That is not always the best decision. When I checked today I saw it was about 33% down from the November highs. (I have used URNM as an illustration for the general uranium sector).
I do however own the decisions made since November. The initial strategy has been to add every month and stomach the volatility.
Right before the November high, the value of my portfolio was high enough for me to exit the trade and be happy with the results. That meant that I would break my initial strategy. Something I only want to do if the thesis changes. I decided to stick to my initial strategy, and by doing that, I accepted responsibility for all of my results today. My results are not dependent on decisions outsourced to other people. My portfolio being down 33% is something I can live with.
The developments we are seeing now in the general stock market is in the top three bear case-scenarios for my portfolio. (The general stock market is turning over and is dependent on FED intervention). If the cavalry does not come to the rescue, the general stock market will continue down, and few know where we will end up in the end. Commodity equities are still equities and follow the general market. (There are a lot more nuances here, but nuances are not the topic for today).
What you think will be the FED response to this development will decide how you invest going forward. The range is wide. From going 100% to cash to going all in. The only thing I know is that the next couple of weeks will be interesting…
When most people talk about a repeat of the last bull market in uranium, they are thinking in terms of expected returns. One of the biggest deciding factors for expected returns is the valuation of your investment at the time of entry. If the company you are investing in is pricing in a price of $200/lb for uranium, you might need an Elon Musk at the helm to get great returns.
Valuation
Some veterans of the last bull market were waiting for uranium companies to fall to real liquidation levels in 2020 and 2021. I think there are two factors that made certain that we did not go there compared to the valuation of uranium companies in 2000.
First of all, during the early 2000s, retail did not have the same availability of tools like Youtube and social media to get to know about the uranium sector. There were message boards, but the uranium story did not get far outside that group. People who invested in the sector in 2000 had connections to the resource investment community, or had industry knowledge about the sector. This led to only a select number of investors buying into the sector and giving financing to the mining companies.
Now we have social media that have helped spread the message of the sector far and wide for years. Veteran, and new investors who have talked publicly about uranium, have led to a steady stream of new investors entering the sector, bidding up the companies. This has helped the uranium companies from dropping to valuations where speculators could find Paladin at the bottom of the last market. In companies where trading volumes are low, even small amounts can move the price and influence the valuations of companies.
Secondly, I think we probably could have seen a last big capitulation in 2020 or 2021, if we did not have Covid-19, which led to the closure of Cigar Lake and the disruptions in Kazakhstan. This led to increased buying in the spot market from producers like Cameco, which in turn led to the spot price going up. For the first time in years we saw the sentiment shift.
The spot price going up above $33 in April 2020, up $6 from March 2020, was enough for companies being able to raise money at considerably better terms in the second half of 2020 than the first.
Know what you want to get out of the market
Valuation is key when it comes to expected returns. We are not in the first inning anymore. A stock that has gone up 100%, all else being equal, is half as attractive. A bull run like the early 2000 is also very rare, and is not something we should count on. I think we will see a very strong uranium market going forward, with returns at multiples from the valuations we see today. Inflation, secondary demand from financial players like SPUT, an actual supply deficit (and not just a hypothetical one in the future), are just a few factors that make me very optimistic.
TradeTech
It might not look like it, but not everyone invested in the sector is looking for Paladin returns. Going from $0.1 to $10 where an investment of $10,000 can go to $990,000 is not what most people are aiming for. Personally, I have invested so that I will be happy with a 10X for the average holding in my portfolio. (The equivalent of holding Paladin from $0.1 to $1.0). It is important not to be a victim of the monkey trap. Following a strategy for scaling out your positions is key.
It is important to note that my strategy is based on the fact that most of my positions were set during 2019 and 2020. With later positioning I would not aim for the same returns. I do not need a bull market like the last one to be happy. For every investor in the sector it is important to know in advance what returns you will be happy with.
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.
Happy New Year to everyone. 2021 is behind us, and we have 2022 ahead of us. Today I will mention the three biggestpositive triggers I am looking at in the uranium sector in the coming year. I hope that 2022 will be a great year for us all.
Long-term contracts
We have heard of some contracts being signed in 2021. I expect we will see even more of this activity in 2022.
“a reactor that runs out of uranium is just an expensive paperweight.”
There is no substitute for uranium. We are now one year closer to the years 2024 to 2026 where a lot of contracts roll off.
I used the above graph a lot last year, and I hope we will see a 2022 version of it.
Companies like Kazatomprom and Cameco need communication from their customers if they are to increase their production after 2023. Producers increasing production will however not be enough. New mines need to come online to cover demand at the end of the decade. There are some developers aiming to get in production after 2025, but you only want part of your supply coming from an unproven entity.
EU green taxonomy
It looks more and more like we will get nuclear power (and gas) included in the green taxonomy. A draft for the taxonomy text was sent just minutes before central Europe went into the new year and 2022. There are still possibilities for delays with the EU bureaucracy, but getting a draft out before 2022 leaves me hopeful.
Getting access to financing at more favorable terms, and access to a bigger pool of investment groups can do a lot for the build out of more nuclear reactors. The sector has had several regulatory disadvantages that have made construction of nuclear plants very slow and costly compared to other alternatives. Just changing this slightly can be very positive for the future of nuclear power in the European Union. Before 2021 this was not on our radar so this change is already very positive.
SPUT NYSE listing
The last factor I am looking at is the listing of Sprott Physical Uranium Trust on the New York Stock Exchange. With an investment pool that is about 10x the size of the Toronto Stock Exchange, ($28T vs $3T) this can have a very big impact. If we get interest from big financial players, we might see a price where more of the above ground inventory moves into Sprotts hands. Mobile inventories of uranium being sold into the market, and Kazatomprom flooding the market with cheap pounds, are two of the most popular bear arguments for the sector. The more answers we get to these arguments, the better it is for investors.
Conclusion
These are the three things I am looking at in 2022. If you have other ones just leave a comment here or on Twitter.
We are at the moment looking at a future with nuclear power growing in the western countries for the first time in decades. With growth in the sector mainly being designated to the East so far, this is not something to scoff at. On Wednesday 22 December we will probably get a decision if nuclear power will be included in the green taxonomy. This will open up the possibility for cheaper financing and make it much easier for many funds to invest in the sector. The coming week is therefore a very exciting one.
This comes at a time where people in Europe have to deal with high energy prices, and an uncertainty about availability of energy in the coming months. As with almost everything, we have experienced similar situations before.
Looking to history
Certain things seem to repeat from time to time. In the 70s we had an energy crisis that showed the world how dependent we were on oil for our energy needs to keep society running.
«The oil crisis arose in the western countries in the winter of 1973–1974. The price of petroleum increased when production was reduced, which led to austerity measures and restrictions on, among other things, driving. The background to the crisis was the war between Israel and Egypt/Syria, called the Yom Kippur War.
The member countries of OPEC, decided to raise crude oil prices by 70 percent, from $3 to $5.11 per barrel, and to cut production by five percent for each of the following months until Israel withdrew from the occupied territories.
On January 1, 1974, OPEC raised prices to $ 11.65 a barrel».
(Translated and abbreviated from the Great Norwegian Encyclopedia).
We also had a drop in oil production in the wake of the Iranian Revolution in 1979, known as the 1979 Oil Shock, or Second Oil Crisis that pushed the price of oil even higher.
You have probably seen pictures of the 70s with lines at the gas stations, and similar situations. In Norway there was a ban on driving cars during the weekend for a time. (One of the most famous pictures from 1973 was of the Norwegian King Olav V, taking the tram together with the regular citizens to go skiing. It was mainly a publicity stunt, but this helped solidify his reputation as “The King of the People”).
The oil crisis led to many trying to find solutions to be less dependent on oil. Necessity is the mother of invention. Just as people managed during World War II with rationing, with most goods in short supply, many people came up with ingenious solutions. As an example we had people driving cars that ran on coal, or even wood.
You also had solutions being made on the national level. Many of the 56 nuclear reactors in France were built following the 1973 oil crisis. In March 1974, the French Prime Minister Pierre Messmer announced what later became known as the “Messmer Plan”. This was a huge program aimed at generating all of France’s electricity from nuclear power. (At the time of the oil crisis France was dependent on a lot of foreign oil for their energy needs). France looked to nuclear power as a solution to this dependency.
At the moment we look to be just as dependent on oil and gas as we were in the 70s. The last decade we have scaled up intermittent renewables, and made them a bigger part of the energy mix, and at the same time underinvested in the fossil sector. The underinvestment in fossil fuels has led to lower supply available, and higher prices.
We’ve already had heads of state like Macron and Johnson coming with announcements about renewed investments in nuclear power in France and the UK respectively. Several other western countries have done the same. With the possibility of a colder winter than usual, and supply lines stretched already, we might get more countries on board with nuclear power. One winter similar to 1973 and we might get another, if not a Messmer moment, maybe a reversal of the opposition to nuclear power from other countries.
You might have noticed that I have not published for a little while. The last few weeks I have had a lot of costs to cover, and have not been able to take advantage of the weakness in the market. When I can’t take advantage I revert to my second best strategy (for now), do nothing. That also means taking less part with the discourse where you sometimes meet frustrated people.
I do not see a lot of triggers as we are getting closer to the end of the year, but we might get news of nuclear being included in the green taxonomy 22. December. I just hope that it is not discounted into the companies valuations already, as with section 232 in July 2019, and a negative outcome will lead to a sell off in the sector.
This week I will just make a small case that people who start out now should hold closer to an Equal Weight Portfolio, and not be so dependent on their favourite company doing better than the rest in the sector. Many are talking about their biggest allocations like they are football teams. When you are not a fan of football, and look at it from the outside, it seems a bit silly. I have mentioned some of my winners before so I am not innocent here myself, but I try not to be a big part of the “pump” crowd. That is why I would approach the sector more in this way if I was starting today.
Equal Weight Portfolio
Equal Weight Portfolio is an alternative to the Market Weight Portfolio you see in most sector ETFs. Sector ETFs allocate most of the money to the biggest companies and less to the smaller names. (The biggest companies are in some cases already profitable, and do not always have the same leverage to higher prices as the smaller companies. They also do not have all the risks that come with investing in smaller companies). If I believe the sector is mispriced and going into a strong period, I would rather allocate the same amount to my selection of companies, than using market weighting.
If there was an equal weight version of the URNM, I would say that is very close to the optimal allocation for me when I was a beginner. I give all the different companies the same allocation at the start and give them room to outperform. I do not sell them down because their allocation gets too high due to outperformance, according to the rules of many funds. I let the winners run.
URNM allocation if it uses equal weight for the companies
My biggest negative here is that URNM has a long list of companies (there are about 35). Replicating it is not necessarily a cheap option in terms of commissions. (If someone could offer an ETF fund similar to this I think it could get very popular).
You can do a lot of work and be selective too, but in some instances you get 80% of the benefit with 20% of the work. The veterans and the full time professionals have maybe had the time to investigate all the different companies in the sector beforehand. I did not do that when I started out in the sector and I made a lot of mistakes in the beginning. (I do not believe that anyone has a perfect portfolio, and I also believe that if people can have a perfect portfolio they might sell down too early).
One of the mistakes I made was that I made my positions in a couple of positions without having a good enough overview of the sector. My two best performers (so far) were not a part of this initial allocation. Both of them were already trending in the right direction compared to the rest of the sector, but I didn’t even know they existed. I was still able to get a decent position in both of them, and I have been able to take advantage of corrections to add to them.
Another thing I have seen is that it is not always what you think is the “best” company that has the best returns. It all depends on the valuation of the company. From March 2020 low you had Forsys Metals go up to over 1 000% in returns (at one time) with just an old DFS and minimal work in the company. Compare that to a lot of the other companies that have (at least pretended to have) done a lot of work in the last 10 years of the bear market. I am singling out Forsys out here because they have been so silent that they slipped under my radar. For a guy looking for hidden value, I failed in finding this company. The market is seeing a lot of value in this company as the search for mineable pounds in the world is increasing.
Conclusion
I try to be as neutral as possible about the positions I already own. I do not want to be too attached to one company.
I have two beliefs in my head going forward, and they can both be true. My best performers can be overvalued compared to peers, and the rest of the sector might catch up. They can also continue to outperform because of great management.
This week I have struggled to find anything inspiring to write about. I do not want to write another post about how to deal with draw-downs or volatility. I have written posts about that already. As long as we are under the marginal cost producer, I still think we have a long way ahead of us. This is just one of many corrections to come.
Veteran uranium investors
Instead I will write a short write up about my first 10 years of investing my own funds and some anecdotes I have found and learned from on the way.
My investment story so far
In the beginning of my investment career I was a third year student at business school without a lot of money. I wanted to learn about investing and found the best thing was to experience it for myself. I therefore created an account for myself and started trading. The first thing I learned was there was a big difference from theory to practice. The rush of endorphins if I saw my stocks go up 5% in a day at the beginning can only be compared to winning at a slot machine. The clinical descriptions in the textbooks were not good at describing how investing felt.
I learned about diversification, the efficient market hypothesis, how it is practically impossible to beat the index at school. At the same time I read a lot of books on investment strategies, the stock market, and economic history on my own time. In the beginning I just about followed every strategy I read about at once. This led to results that can only be explained like the decisions were made by a headless chicken. Long story short, I lost money. In retrospect I will choose to call it my school money. Luckily the amounts were 0.1% of what I have invested today.
Me trying to invest
In the following years I tested out a lot of different strategies, I just made sure it was one at a time. In 2012 I was very enamoured with dividend stocks and wanted to receive as high cash flow as possible from my investments. I was not alone in this sentiment. Many people have felt the allure of cash flow from investments. Andrew Carnegie, one of the more famous tycoons, being one of them:
Private picture from Andrew Carnegie’s birthplace museum
Like every other investor I also had a stop by Warren Buffet and value stocks, but I did not have the experience at the time to stick to that plan. In the end I found the best thing for me, as an impatient investor, was investing in quality stocks that had steady revenue growth. The FAANG stocks, and other tech giants, became the staple of my portfolio for years. Something that was very profitable for me. Instead of the index beating me all the time, I started to outperform it. I also had to pay a lot less attention to the markets. The companies just continued to go up.
This could very easily have been the end of my investment journey, but I was always looking for new inputs. I was looking into angel investing and the “Unicorns”. A lot of what I saw there did not make any sense to me. You had competing ride-share companies Uber and Lyft, who were both valued in the billions. Both of them did not have any plans to be profitable for years. (I think the low interest environment has been a big factor in these valuations. Very low discount rates for future cash flows, increase the value of the company today).
What put me over the edge here was WeWork and their failed IPO in 2019. Angel investors had just inflated the valuation of the company on the way up to $47 billion. When the company was ready for the “dumb” institutional and retail investors, interest just evaporated when they scrutinized the numbers. Afterwards we saw SoftBank come out with this graph saying “some time into the future we will be profitable”. It did not specify the amounts, or the years it would take. I would rather choose to invest with 50 Cent and “Get Rich or Die Tryin’” as my only strategy over this.
Looks like a clear plan to me
At the same time I learned about Howard Marks and his view of the general markets. He talked about a group of companies in the late sixties that were called the “Nifty Fifty”. These were quality companies that were great investments no matter what price. They were improving profitability, had moats against competitors, and would be around for decades to come. Still, these companies in the end became overvalued. Before the bubble burst in 1973-74 they had a P/E of around 100. After the market turned, these companies fell much more than the market in general. The reason was simply that these companies were overvalued. They were not outcompeted by others in the market. You can find most of these companies today, and they are still market leaders. (Pfizer, Coca-Cola Company, General Electric, Procter & Gamble, McDonald’s, The Walt Disney Company, American Express, Xerox og Black & Decker). In the end valuations matter. At work I was hearing the same thing being said about a lot of the companies I was investing in.
That is why I decided to look for new sectors in 2019, and what made me look to the uranium and commodity markets. The change from growth stocks to deep value in commodities was not without its challenges. From the beginning I had trailed the Norwegian Benchmark Index (OSEBX). This was a natural result of my horrible beginning. After I went over to the growth stocks I started to outperform the markets some of the years. I even started to catch up to the head start I had given the index. When I switched my portfolio over to uranium I had a big test of conviction in my portfolio from July 2019 until March 2020. My investments in uranium were performing horribly, and I just lost more and more ground to the index. After 8 years investing I was having my worst year. It seemed like I just had invested in hopes and dreams. (The investments I had exited were still performing very well during this time). If I was at one point doubting my thesis, this was the most important time for me. Without faith in the investment thesis I would have exited my positions during this time. Instead I went over it again and invested more. From March 2020 the different commodity markets started their run and I started to outperformance the index. (The OSEBX index is heavily weighted to energy).
My portfolio in blue and the OSEBX index in yellow
I am here showing my first investment account that I still have today. (I have started other accounts that have beaten the index for longer, but I show the first one to make a point). You do not need many great ideas in your career to outperform. You just have to survive long enough to catch the big wave when it comes along.
I do not plan to marry my investments. I am constantly looking for new places to put my money, but I will not scale out of my current positions before I see better opportunities elsewhere. I talk a lot about investment strategy, but not so much about change of strategy. I am not saying change strategy every year, but as the conditions change, I am always willing to scrutinize and change it. So should you.
It has been two weeks since my latest uranium update and it has been a very eventful time. We had the announcement of China planning to build 150 reactors last week. This is massive news that will have a huge impact on demand going forward. Late this week the sector got more somber news with the Clearwater River Dene Nation serving notice on the uranium industry regarding impacts of uranium mines and exploration in SaskatchewanCanada. This has led to some heated discussions and a lot of opinions.
The CRDN community has:
grave concerns about the potential impacts and risks posed by an increasing number of uranium mining and milling projects and exploration activities occurring within its Traditional Lands.
This is a serious issue and should not be swept under the rug. The mining industry has a long history of not treating all the different stakeholders fairly. (Workers, the environment or investors etc). In Canada it is not unusual for mines taking 10-20-30 years to get into production. There are a lot of environmental permits and social approvals needed before you can start production. I wrote about my allocation to Canadian companies on 14. March 2021, and permitting is a big reason why it was on the smaller side compared to other jurisdictions.
Challenges in terms of permitting in Canada have never been a secret. Compared to grades, and quality of assets, the Canadian companies have been trading at a discount compared to companies in other jurisdictions. Episodes like this proves that a discount might be warranted. Social licence being an important part of the mix. I am also certain that some companies are better than others in this area, but I do not want to touch the specific First Nations case here because I do not have all the facts. This is a reminder of how important this is. (In Norway we just had a Supreme Court ruling that a wind-park has to be taken down because it was in violation of indigenous peoples’ rights).
Going over some of my earlier thinking
I have read over some of my older articles and I am happy to say that I know more today than what I did a year, or six months ago.
One thing I firmly believe in is that the stock market will very often turn before the general market. When uranium companies rose rapidly at the end of 2020 there was no price movement to speak of in the spot or long term market. Still the equities were anticipating the sector would improve. I mentioned this in one of my posts in July 2021:
Even the notion that we are in a bull market is still contested by some. The spot is not above $35 yet, and one can say that we still do not have confirmation. I think that by waiting for confirmation, you risk the market getting away from you. If you only place chips on the table when you know the outcome in advance, you will have to settle for a lower return.
1 year price uranium
I think I was right about that one. We can compare the change in equities over the last year compared to the move in spot price. The move in the spot price did not really start before the end of August. If we compare this to three companies: Fission Uranium, Energy Fuels and Global Atomic, they went up about 88% (CA$0,26 to CA$0,49), 174% ($1,74 to $4,77) and 275% (CA$0,64 to CA$2,4) before the spot in earnest started to move from $30 to $47. You miss out on big gains waiting for price confirmation.
Equities have continued climbing up afterwards, but people who have waited for spot price to start running are a lap behind.
Going forward
For me the easy part of this investment is over. Holding conviction when everything is horrible is easy for contrarians. The minute things start looking better, it gets harder. Contrarians want to exit the party when other people arrive. You do not want to leave too early, and let everyone else have all the fun.
I have dipped my toe in the more mainstream crowd this week. I am happy to report that no one I talked to had heard about China and their 150 planned nuclear power plants. (They had only heard about them not attending COP26 in Glasgow). I therefore see the most eager guests are arriving, but we still have a long way to go.
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.»
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.»
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.»
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.
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.“
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.
Silver investors
“However, it appears that somewhere around February 1st, SLV changed their prospectus to suggest that “not all of the silver is there.”
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.»
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.
We are always getting new people coming to the uranium sector and we sometimes forget that everyone has to start from somewhere. The supply and demand imbalance is the reason most of us have invested, but how much people know about the sector varies a lot. How well covered utilities are is of the highest importance.
Many have heard of two to three years of inventory, and concluded that utilities will run out of fuel in 24-36 months if they do not buy more in the spot market or contract now. Then, one year later at the year end reporting, we hear they still have the same amount of inventory. What gives?
Utilities have on average two to three years of inventory as their security stock. They still get supply from continuous deliveries from their contracts (long/mid/short-term suppliers, spot and carry traders) that they consume. (While many visualize that utilities just get everything in one big batch, and then draw it down over several years). The time that these contracts run off in the future is what is important, because that is the time when the clock starts ticking. How many are covered in 2025?
How long of a runway do they have?
We might have just simplified too much, but the bullish case and contracting will still improve going forward, and now utilities can not top off inventories with cheap spot or the carry trade. Spot market is now being occupied by financial players for the most part.
Yellow Cake PLC
This graph from Yellow Cake PLCs October presentation uses very credible numbers on both US and EU contract coverage. (If the most credible people I know in the sector use the 2020 Uranium Marketing Annual Reportfrom EIA as their reference, it is good enough for me).
Next year (2022), 16% of US utilities will not be covered and have to eat off their inventory. They do not want this inventory to get too low. We hear the average inventory has two to three years of supply, but I expect individual differences here. (There are always some who are better covered than others, and we always look to the extremes). Activity will pick up, and utilities who have contracts ending later in 2025-2026-2027-2028 will observe. They will see how much of supply will be made unavailable by the ones who contract first, and maybe contract earlier to avoid risk of being uncovered.
2021 98% covered (2% uncovered)
2022 84% covered (16% uncovered)
2023 72% covered (28% uncovered)
2024 61% covered (39% uncovered)
2025 55% covered (45% uncovered)
2026 42% covered (58% uncovered)
I do not know all the ins and outs of the market, but I know human psychology, and that has not changed much in the last 10 000 years. Just as most investors prefer to buy as part of a crowd, most other buyers in other sectors do the same. Grant Isaac, CFO of Cameco, talked a bit about that subject a couple of weeks ago and I made a post about it then. If the short term uncovered companies contract a lot of supply in the future, the companies that are covered in the 2026-2030 and onwards timeframe also have to start paying attention.
We know that three years is tomorrow in terms of getting production online. At least if you need supply from hard rock mining, and not from ISR. Kazatomprom has their 20% below subsoil agreement through 2023, so they are not filling that gap for a good time going forward. Kazatomprom CEO Galymzhan Pirmatov said
«Consistent with our market-centric strategy, we intend to continue exercising commercial discipline, which will result in 2023 production remaining 20% lower than previously planned subsoil use contracts levels, keeping production essentially flat in 2022 and 2023».
The market has spoken and Kazatomprom has acted according to this demand. They have to increase their CAPEX the next couple of years to get new mines online, when the older ones are depleted. They want higher prices in the future to supply the market with uranium. As the most reliable producer for the last five to ten years they can demand this from the market.
To end this post I will just remind people that if your inventory is well stocked or not depends entirely on the situation. Something people experienced with toilet paper in March 2020. If you had supply for two weeks, but the next supply of toilet paper could not be delivered before three weeks, you were screwed.
