Oct 31

Tea Leaves & $2000 Gold

Gold Price Comments Off on Tea Leaves & $2000 Gold
Yes, some people are still forecasting $2000 gold by year’s end…

BOB and BARB Moriarty launched 321gold.com over 10 years ago, adding 321energy.com the better to cover oil, natural gas, gasoline, coal, solar, wind and nuclear energy as well as precious metals.
Previously a US Marine fighter pilot, and holding 14 international aviation records, Bob Moriarty here tells The Gold Report why he’s 100% certain that a market crash is looming… 
The Gold Report: Bob, in our last interview in February, we had currency devaluation in Argentina and Venezuela, interest rate hikes in Turkey and South America, and a cotton and federal bond-buying program. Just eight months later in October, we’ve got Ebola, ISIS and Russia annexing Crimea plus a rising US Dollar Index. We’ve also got pullbacks in gold, silver and pretty much all commodity prices. With all this news, what, in your view, should people really be focusing in on?
Bob Moriarty: There is a flock of black swans overhead, any one of which could be catastrophic. The fundamental problems with the world’s debt crisis and banking crisis have never been solved. The fundamental issues with the Euro have never been solved. The world is a lot closer to the edge of the cliff today than it was back in February.
About ISIS, I think I was six years old when my parents pointed out a hornet’s nest. They said, “Whatever you do, don’t swat the hornets’ nest.” Of course, being six years old, I took stick and went up there and swatted the hornets’ nest, which really pissed off the hornets. I learned my lesson.
We swatted the hornets’ nest when we invaded Iraq and Afghanistan. What we did is we empowered every religious fruitcake in the world. We said, “Okay, here’s your gun, go shoot somebody. We’ll plant flowers.” We are reaping what we sowed. What we need to do is leave them to their own devices and let them figure out what they want to do. It’s our presence in the Middle East that is creating a problem.
TGR: Will stepping back allow the Middle East to heal itself, or will there be continued civil wars that threaten the world?
Bob Moriarty: We are the catalyst in the Middle East. We have been the catalyst under the theory that we are the world’s policemen and that we’re better and smarter than everybody else and rich enough to afford to fight war after war. None of those beliefs are true. The idea that America is exceptional is hogwash. We’re not smarter. We’re not better. We’re certainly not effective policemen.
The Congress of the United States has been bought and paid for by special interest groups: part of it is Wall Street, part of it is the banks and part of it is Israel. We’re just trying to do things that we can’t do. What the US needs to do is mind its own business.
TGR: You’ve commented recently that you’re expecting a stock market crash soon. Can you elaborate on that?
Bob Moriarty: We have two giant elephants in the room fighting it out. One is the inflation elephant and one is the deflation elephant. The deflation elephant is the $710 trillion worth of derivatives, which is $100,000 per man, woman and child on earth. Those derivatives have to blow up and crash. That’s going to be deflationary.
At the same time, we’ve got the world awash in debt, more debt than we’ve ever had in history, and it’s been inflationary in terms of energy and the stock market. When the stock and bond markets implode, as we know they’re going to, we’re going to see some really scary things. We’ll go to quantitative easing infinity, and we’re going to see the price of gold go through the roof. It’s going to go to the moon when everything else crashes.
TGR: How are you looking at the crash – short term, before the end of this year? How imminent are we?
Bob Moriarty: Soon. But I’m in the market. Not in the general market, but I’m in resources. There’s a triangle of value created by a guy named John Exter: Exter’s Pyramid. It’s an inverted pyramid. At the top there are derivatives, and then there are miscellaneous assets going down: securitized debt and stocks, broad currency and physical notes. At the very bottom – the single most valuable asset at the end of time – is gold. When the derivatives, bonds, currencies and stock markets crash, the last man standing is going to be gold.
TGR: So the last man standing is the actual commodity, not the stocks?
Bob Moriarty: Not necessarily. The stocks represent fractional ownership of a real commodity. There are some really wonderful companies out there with wonderful assets that are selling for peanuts.
TGR: In one of your recent articles, “Black Swans and Brown Snakes“, you were tracking the US Dollar Index as it climbed 12 weeks in a row, and you discussed the influence of the Yen, the Euro, the British Pound. Can you explain the US Dollar Index and the impact it has on silver and gold?
Bob Moriarty: First of all, when people talk about the US Dollar Index, they think it has something to do with the Dollar and it does not. It is made up of the Euro, the Yen, the Mexican Peso, the British Pound and some other currencies. When the Euro goes down, the Dollar Index goes up. When the Yen goes down, the Dollar Index goes up. The Dollar, as measured by the Dollar Index, got way too expensive. It was up 12 weeks in a row. On Oct. 3, it was up 1.33% in one day, and that’s a blow-off top. It’s very obvious in hindsight. I took a look at the charts for silver and gold – if you took a mirror to the Dollar Index, you saw the charts for silver and gold inversely. When people talk about gold going down and silver going down, that’s not true. The Euro went down. The Yen went down. The Pound went down and the value of gold and silver didn’t change. It only changed in reference to the US Dollar. In every currency except the Dollar, gold and silver haven’t changed in value at all since July.
The US Dollar Index got irrationally exuberant, and it’s due for a crash. When it crashes, it’s going to take the stock market with it and perhaps the bond market. If you see QE increase, head for your bunker.
TGR: Should I conclude that gold and silver will escalate?
Bob Moriarty: Yes. There was an enormous flow of money from China, Japan, England, Europe in general into the stock and bond markets. What happened from July was the equivalent of the water flowing out before a tsunami hits. It’s not the water coming in that signals a tsunami, it’s the water going out. Nobody paid attention because everybody was looking at it in terms of silver or gold or platinum or oil, and they were not looking at the big picture. You’ve got to look at the big picture. A financial crash is coming. I’m not going to beat around the bush. I’m not saying there’s a 99% chance. There’s a 100% chance.
TGR: Why does it have to crash? Why can’t it just correct?
Bob Moriarty: Because the world’s financial system is in such disequilibrium that it can’t gradually go down. It has to crash. The term for it in physics is called entropy. When you spin a top, at first it is very smooth and regular. As it slows down, it becomes more and more unstable and eventually it simply crashes. The financial system is doing the same thing. It’s becoming more and more unstable every day.
TGR: You spoke at the Cambridge House International 2014 Silver Summit Oct. 23-24. Bo Polny also spoke. He predicts that gold will be the greatest trade in history. He’s calling for $2000 per ounce gold before the end of this year. We’re moving into the third seven-year cycle of a 21-year bull cycle. Do you agree with him?
Bob Moriarty: I’ve seen several interviews with Bo. The only problem with his cycles theory is you can’t logically or factually see his argument. Now if you look at my comments about silver, gold and the stock market, factually we know the US Dollar Index went up 12 weeks in a row. That’s not an opinion; that’s a fact. I’m using both facts and logic to make a point.
When a person walks in and says, okay, my tea leaves say that gold is going to be $2000 by the end of the year, you are forced to either believe or disbelieve him based on voodoo. I don’t predict price; I don’t know anybody who can. If Bo actually can, he’s going to be very popular and very rich.
TGR: Many people have predicted a significant crash for a number of years. How do you even begin to time this thing? A lot of people who have been speculating on this have lost money.
Bob Moriarty: That’s a really good point. People have been betting against the Yen for years. That’s been one of the most expensive things you can bet against. Likewise, people have been betting on gold and silver and they’ve lost a lot of money. I haven’t made the money that I wish I’d made over the last three years, but I’ve taken a fairly conservative approach and I don’t think I’m in bad shape.
TGR: Describe your conservative approach.
Bob Moriarty: The way to make money in any market is to buy when things are cheap and sell when they’re dear. It’s as simple as that. Markets go up and markets go down. There is no magic to anything.
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Feb 14

A Blindford, a Dart, and a Winning Gold Miner Stock

Gold Price Comments Off on A Blindford, a Dart, and a Winning Gold Miner Stock
Really it’s that simple after the December sell-off, says Bob Moriarty…

BOB and BARB Moriarty brought 321gold.com to the internet more than 10 years ago, later adding 321energy.com to cover oil, natural gas, gasoline, coal, solar, wind and nuclear energy.
Both sites feature articles, editorial opinions, pricing figures and updates on current events affecting both sectors. And according to Bob Moriarty – previously a Marine F-4B and O-1 pilot with more than 820 missions in Vietnam and holding 14 international aviation records – “fact that everyone hated gold in December is a good reason for rational people to love it now.”
Indeed, as he tells The Gold Report here, many good gold mining stocks now sell for “peanuts”. All you need to pick a winner is a blindfold and a dart…
The Gold Report: Bob, in the last few weeks, Argentina and Venezuela have devalued their currencies and the central banks in Turkey and South Africa hiked interest rates. The US Federal Reserve cut its monthly bond buying by another $10 billion. What do you make of all this happening in such a short timeframe?
Bob Moriarty: In a way, I will take credit for having predicted it. The world is bankrupt, and not one government is talking about reducing expenses. They talk about austerity, but austerity means living within one’s means. Governments refuse to do that.
The Fed has three options: It can continue to taper, maintain the status quo or increase its bond buying. I think there’s a good chance it will take that third option. We need a big crash first.
TGR: What message does that send to the general market?
Bob Moriarty: It says we’ve run out of bullets, head for your bunker.
TGR: That can’t be the message the Fed wants to send.
Bob Moriarty: The message it intends to send is one thing; the message it actually sends is something else.
Events in 2008 were only the opening act. The financial instability and the pressures in the markets are far worse today than they were in 2008. We had the chance to fix things back then, but Ben Bernanke, Alan Greenspan and Tim Geithner panicked and made the situation far worse.
TGR: You sent me an article by James Gruber titled, “Welcome to Phase Three of the Global Financial Crisis“. In it, he writes, “The system broke down in 2008 and again in Europe in 2011 and now in the emerging markets in 2013 and 2014. The market reaction to the latest events has been abrupt and violent, particularly in the currency world. In my experience, markets generally cope well when there is one crisis but when there are multiple spot fires like last week, most markets don’t cope well.” Is there more to come?
Bob Moriarty: Of course things will keep getting worse until somebody understands that the real issue is debt. There are $694 trillion in derivatives. That is financial debt that can never be paid off. The world has been a giant casino for the last 20 years, and it’s all coming to a head.
TGR: How does devaluing their currencies help Argentina and Venezuela?
Bob Moriarty: It doesn’t. Every government in the world is spending money it doesn’t have. The only solution is to stop spending money. Everyone refuses to do that because governments gain power by spending money. They will spend money until they’ve bankrupted all of their citizens.
TGR: In Greece and in Spain, the European Union has implemented mandatory austerity programs to pay off their bonds. Shouldn’t Greece and Spain be seeing economic improvement now that they’ve implemented those severe austerity programs?
Bob Moriarty: There is no economic improvement. It’s all smoke and mirrors. It’s similar to climbing to the top of a 50-storey building and jumping off. Once you’ve jumped, it doesn’t matter what you do on the drop down. You’re going to hit the ground. They need to crash so they can rebuild on a solid foundation.
Calling it austerity is using semantics to play with the citizenry. If one honest politician stood up and said, “We’re spending more money than we have. We need to stop,” that would put us on the way to curing the problem. But the politicians keep pretending there are other solutions.
President Obama’s charade in the State of the Union message was interesting. He was a Constitutional law professor before going into politics, yet in his speech he said the president of the US can unilaterally change the minimum wage. Did he ever read the Constitution?
TGR: Apparently, he does have the ability to change it, but only in upcoming, new federal contracts.
Bob Moriarty: There are three separate branches in the American political system: the executive, the legislative and the judicial. The president of the US does not make laws; he enforces them. His ability to do something is not the same thing as it being legal. All federal financial bills have to start in Congress. The president of the US simply cannot change the minimum wage. It’s not part of his job.
TGR: Wages earned by low-wage workers aren’t increasing at the same rate as inflation. As a result, the minimum wage today doesn’t give the same amount of purchasing power as it did when it was first implemented. Should the minimum wage be hitched to inflation or should it just be abolished?
Bob Moriarty: If you make the minimum wage $10.10/hour, people who are gainfully employed at $8.50 have lost their jobs. All minimum wage laws do is eliminate jobs.
If minimum wage laws worked and helped people, we should pay everybody $100/hour. But as soon as you say $100/hour, everybody says, nobody can afford that, which is true. There are people who cannot afford $10.10/hour. There are workers not worth $10/hour.
In the EU, seven countries do not have minimum wage laws, 20 do. In the seven countries without minimum wage laws, the unemployment rate is just over 8%. In the 20 countries with minimum wage laws, the rate is over 11%. Minimum wage laws, no matter how well intentioned, cost an economy jobs.
The economic stability of any country is based on the number of people in its middle class. There are rich and poor people in every society. That is as true as it is meaningless. The key to economic and political stability is the size of the middle class.
The policies of George Bush, which have been compounded by Barack Obama, have destroyed the middle class.
TGR: How have they done that?
Bob Moriarty: First, people can’t save money. If you save money at 0.25%, you’re insane; inflation robs you of your real wealth. Second, taxes have increased. There are something like 48 separate taxes in Obamacare that have nothing to do with healthcare.
The Affordable Care Act, Obamacare, is the nail in the coffin of the middle class. It is a giant payoff to the insurance companies. The insurance companies are protected under law. They are allowed to collude and do things no other industry can. As a result, the US has one of the least effective healthcare systems in the world and the most expensive. We need to burn the healthcare system down and start all over again. The insurance companies have the American public’s throats in a death grip and they’re killing us.
TGR: Following on the general topic of insurance, you’ve talked about using precious metals as an insurance policy in a crisis. Do you mean the metal, the equities or a combination of both?
Bob Moriarty: I see the physical metal as an insurance policy. Once investors have that policy in place, the equities are what they do with their investments. There are some wonderful companies selling for peanuts now that will do well no matter what happens – inflation or deflation.
TGR: How much of a portfolio needs to be in precious metals to have a good underlying insurance policy?
Bob Moriarty: That depends on the person and the amount of money available. Everybody has a different level.
If my total worldly assets were $1000, I would put all of it into silver or gold coins. If I had $100,000, I’d probably put half of it into silver and gold. If I had $1 million, the percentage would be 5-10%.
I was recommending metals even when gold was $268 per ounce and silver was $4 per ounce. All investments go up and down, and investors have to be prepared for that, but that doesn’t change the fact that metals are the best insurance policy.
TGR: I have my insurance policy; I have my gold and silver coins. Where should I look for gold mining and precious metals stocks
Bob Moriarty: You need two things: a blindfold and a dart.
TGR: But you just said there were some really special companies selling for peanuts.
Bob Moriarty: Yes, but the way to pick them is with a blindfold and a dart. 
TGR: Are some opportunities better than others, or do you believe the entire sector will improve? After all, some analysts say that part of the sector needs to go bankrupt.
Bob Moriarty: I can name five or six people who said, in the last three weeks, that we’re at a bottom and it’s safe to buy.
My questions to them are:
  • What were they saying in April 2011 when silver was at a very clear top?
  • What were they saying in June 2013 when it was clear to some of us that the metals were at a bottom?
Bottoming processes last a long time. Silver and gold were at a bottom from the middle of 2000 until the end of 2011. Any one date in that 18-month period was a bottom.
I have a bunch of stocks that are up 50% since 1st December 2013. I think it’s clear that we’ve had a major bottom. This is an incredible opportunity, and the longer people whine about how gold could go lower, the better it is. It’s called climbing the wall of worry.
TGR: You also are excited about copper. Why is that?
Bob Moriarty: A lot of people think the copper price will go down with the rest of the base metals. I disagree. I’ve seen some incredible copper projects in the last six months – very high-grade projects that are reasonably priced to go into production. There are 10 or 20 companies that had projects of low-grade that were going to cost a lot of money. At least 6 to 10 are in the Middle Cauca belt in Colombia, which has enormous resources that, unfortunately, will always be uneconomic.
TGR: Copper is the canary in the coal mine. If we’re going to have a deflationary environment and economies are contracting, it would seem more logical for the price of copper to go down. What makes these particular copper projects good investments?
Bob Moriarty: If copper goes down, they’ll be more valuable. Because these are all high-grade projects, a lower copper price is good for them, because a lower price will drive the marginal producers out of business. The ideal situation is a company that will make money no matter what the cost of copper is.
TGR: Bob, thanks for your time and your insights.
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Jan 14

Russia’s New Win in the Global Energy War

Gold Price Comments Off on Russia’s New Win in the Global Energy War
Already tightening its grip on Europe, Russia is now moving into Africa…

RUSSIA has won another victory over the United States in the global energy war, writes Marin Katusa in the Daily Despatch from Doug Casey’s research group, Casey Research.
This time, the battleground has been South Africa, where Russia’s state-owned nuclear power company, Rosatom, has just signed an agreement to build eight new reactors. Once all of them are operational, South Africa’s nuclear capacity will increase more than six-fold – from 1.8 gigawatts (GW) to 11.4 GW over the next 15 years.
This means that Russia will help develop the entirety of South Africa’s nuclear energy sector, including financing and training. And just as importantly, South Africa will be using Russia’s nuclear fuel.
Rosatom has been busy signing these types of deals with other foreign countries as well – Finland, Turkey, Ukraine, even the United Kingdom – which guarantees that Russia will be able to keep a stranglehold on these countries’ nuclear industries.
The strategy is clear: Rosatom is aiming to become the world’s largest supplier of uranium in the coming years.
Remember what we said about the ongoing “Putinization” of Europe’s oil and gas; how Russia is planning to leverage its control over Europe’s energy to gain political and economic benefits?
The same thing is happening in uranium, except the stakes are even higher – because Putin is now looking to dominate the global nuclear market.
Russia and the former Soviet nations (colloquially called “the -stans”) already control nearly half of the world’s uranium supply:
Similarly, they hold more than half of the world’s capacity for uranium enrichment, a necessary part of fuel fabrication:
Note that the United States only controls 3% of global uranium supply – and less than 15% of the enrichment capacity, despite the fact that it’s the largest consumer of uranium in the world.
While nuclear energy powers one out of every five homes in America, the US currently imports more than 90% of the uranium required for its nuclear reactors.
So what happens when one day Rosatom says “Nyet” to the American utilities? You can be sure that they’ll be scrambling to find any source of uranium they can get their hands on.
And they’ll pay far more than the current spot price of $34.50 per pound. You should know that the price of uranium accounts for just 3% of the total costs of a nuclear power plant, so whether the utilities pay $100 or even $200 per pound of yellowcake is irrelevant, as long as they can keep the reactors running and the lights on in America.
As the US and other countries scramble to get out from under Putin’s heavy thumb, for the right uranium producers outside of Russia’s sphere of influence, this will be a bonanza for the history books.
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Nov 07

Energy Commodity Cycle Turns

Gold Price Comments Off on Energy Commodity Cycle Turns
Prices in the energy juniors stocks are set to turn, says this analyst…

WITH A lifelong interest in geopolitics and the financial issues that emerge, Chris Berry founded House Mountain Partners in 2010.
Focusing on the evolving geopolitical relationship between emerging and developed economies, Chris Berry studies the commodity space and junior mining and resource stocks positioned to benefit from this phenomenon.
Commodities are and always will be a cyclical market, he tells The Gold Report‘s sister title The Metals Report here. And now, says Chris Berry, is the time for investors to position themselves ahead of an upswing.
The Mining Report: In your upcoming presentation in Europe, “The Economic Tug-of-War”, you examine the future of the commodity sector. What are the implications for junior mining investors?
Chris Berry: Let’s start off with the good news. I believe we’re at the bottom of the cycle for the commodities. It’s been a rough 18 to 24 months for the juniors, but the worst is likely behind us. That said, I don’t think we have turned the corner yet toward a new growth cycle. The takeaway is that now is the time to reevaluate these companies with a view for where the global economy will be two or more years from now. The wind is no longer at the back of the entire commodity complex, which means you will need to pay closer attention to the supply demand dynamics of specific commodities.
For example, lithium and nickel have different markets, sources and demand drivers. I monitor each of these factors in detail from a top down perspective until I can drill down to the best junior companies focused on each metal or mineral.
My presentation, “The Economic Tug-of-War”, highlights two competing forces: slow or stagnant growth in the developed world and above-trend growth in the developing world. Much of the macro economic data I see in the US is disinflationary and arguably deflationary. Stagnant wage growth, no velocity of money, and flat commodity prices are not indicators of inflation.
This presents a major challenge for Central banks worldwide, most notably the US Federal Reserve, the Bank of Japan and the European Central Bank, all of which are attempting to re-flate their respective economies through easy money policies like quantitative easing. Japan has instituted its “Three Arrows” policy, which essentially doubles the money supply almost overnight in an attempt to break that country’s multi-decade deflationary spiral. These policies have certainly breathed life into equity markets, but have not helped the broader economy return to historical growth rates. One need only to look at year-to-date returns of equity indexes like the Nikkei or the S&P 500 to see the disconnect between the equity markets and the broader economy.
The Fed is trying to stoke inflation and lower unemployment through its bond-buying scheme. Attempting to solve a non-monetary problem (unemployment) with monetary tools (interest rates) has not been and likely will not be successful.
To be fair, there are some nascent economic bright spots. Industrial base expansion, capacity utilization, Purchasing Managers Index data and related metrics are improving globally. It remains to be seen, however, if this can be sustained.
The other side of The Economic Tug-of-War is the emerging world growth story. I remain very bullish on the long-term prospects in the developing economies despite the slowdown in growth rates across the region. According to The Economist, for 18 of the past 20 centuries, India and China combined had the largest GDP in the world. When viewed through this prism, the current slowdown is a mere blip.
Much of the debate surrounding emerging world growth centers on China (as it should). We know that the official (and debatable) growth rate of the Chinese economy is 7.8%. Despite the fact that the economy isn’t growing at double-digit rates anymore, China is a much larger economy than it was even a few years ago. So you’re seeing slower growth, but from a much larger base. There are numerous challenges the country faces, including reigning in shadow banking, pollution control and shaky demographics, but I still believe the country serves as a model for the shift in economic power we’re seeing from West to East.
What is the takeaway for a junior mining investor? In the near term, you can expect the uncertainty and volatility to continue. With no specific reason for commodities to rocket higher in the near term as a group, this offers you the most valuable commodity of all – time – to take a closer look at select commodities and their trajectories.
TMR: What types of juniors are going to be rewarded by this type of market?
Chris Berry: As an investor in the sector, my top priorities are to identify juniors with the best financial sustainability and the best financial management. Financial sustainability is about having a clean and strong balance sheet. I want to see cash. I want to see liquid assets. I want to see a company that can stay away from debt instruments like convertible bonds, short-term debt or anything more exotic. In this market, I view balance sheet debt as a red flag. It’s important to remember that all debt must be serviced, or repaid. When a company repays debt, they are not drilling or advancing a project forward. It’s hard to see share price appreciation when a company must focus on rewarding creditors instead of shareholders.
Of course, with so many variables out of our control, the depth of experience of management and their ability to navigate through these environments and focus on shareholder returns is extremely important.
Despite the challenging environment, there are excellent opportunities hidden in the sector. We are still active in the space and we think that for patient investors, it’s an interesting place to be because many of these companies have promising assets. Because the whole sector is under pressure, many of the better juniors are being ignored. This won’t always be the case, which again is why it’s important to look at the space with a two- to three-year window. If you think the world will be smaller in the future and commodity demand will not increase, this isn’t the space for you. If you believe the opposite, as I do, then now is the time to conduct thorough analysis.
TMR: In some of your recent writings, you look to the future and see continued global urbanization. Given the tug-of-war between developed and emerging economies, do you still see a valid investment thesis in the commodity sector?
Chris Berry: Absolutely. There have been several articles in newspapers recently reporting on the sustainability and evolution of global urbanization. The basic point is that society needs to look beyond “growth for growth’s sake.” In other words, quarterly GDP only tells part of the story; it doesn’t reveal the total societal costs to get that number.
The New York Times has published images of Beijing and Harbin where the citizens can’t see three feet in front of them at mid-day. The pollution is almost acting as a drag on economic growth and this is unacceptable to the powers that be in China. Yet urbanization will continue and evolve. The authorities in China will achieve growth rates no matter what, but increasingly more attention will be paid to growing in a more sustainable, cleaner and greener fashion.
The investment case for many of the energy metals I follow, like graphite, rare earth elements (REEs) or cobalt, is even more compelling given what I mentioned above, but has been muted due to a slowdown in global growth rates. It’s a long-term thesis. China will continue to face extreme environmental pressures if it continues to develop using the same roadmap. Improving quality of life in the emerging economies is an investment theme that continues to be valid.
TMR: Since you mentioned depressed markets and energy metals, I wanted to get your impressions from the U2013 Global Uranium Symposium you attended and reported on in your newsletter. How has your view on the uranium market evolved and have your investment plans changed?
Chris Berry: I’m a long-term optimist on uranium. However, I’m neutral in the near-term. There are several reasons for this. The extreme effect of the Fukushima accident on investor psychology for the entire industry has really given many pause regarding just how positive the future for nuclear energy is. At the conference, a panelist talked about the psychological effects of nuclear accidents lasting for a generation in the psyche of investors and stakeholders. Never mind the facts. Never mind that nuclear energy is still the cleanest most reliable form of baseload power available. Fear can be a powerful motivator. By now, a lot of people, myself included, thought that Japan would have restarted at least some of its reactors. That hasn’t happened for a number of different reasons. I believe 14 reactors in Japan are being inspected for re-start and so we are inching closer. Some of the uranium that would have powered Japan’s reactors has hit the market and has created a glut. That will take time to work through.
Regardless, the fact is that the spot uranium price is near $35 per pound and the forward price closer to $50/lb. I’m not worried about a short-term price of $35/lb, but it does affect what I will invest in at this stage of the cycle. I am more interested in the global uranium demand in two or three years. The ultimate demand for uranium from new reactors coupled with the need for the current global reactor fleet to be refueled dictate a higher price for uranium in the coming years, which should add leverage to the share prices of those uranium juniors that are near-term production stories.
Another way to invest in the nuclear power generation thesis is through new reactor technology. One example is small modular reactors, or SMRs. Building a full-scale nuclear reactor can cost billions of Dollars and take more than a decade. A modular nuclear reactor has a dramatically lower upfront capex. Modular reactors can be shipped in manageable pieces by rail. In some designs, the reactors are encased underground and offer passive safety systems (they shut themselves down). It is an interesting evolution in technology and we are following companies that are leaders in that space. Full-scale adoption of the technology is not imminent but numerous parties, including the US government, have shown interest.
TMR: So your recommended strategy for investors interested in the uranium space would be to get started on due diligence in both new technologies and near-term production stories. And then be ready to act as the markets improve.
Chris Berry: Yes. It is instructive to look at the situation that the United States finds itself in regarding uranium fuel supply. The US has approximately 100 reactors. A couple of them have received a lot of press for announcing plans to close – one in Vermont and then one in California. Unfortunately, these stories grab headlines but miss the larger point of the necessity to provide reliable and affordable electricity to the grid in the US It would make eminently more sense to rely on a domestic source of critical fuel and to embrace and develop new nuclear technologies on our own soil. Most of the uranium used in the United States comes from outside the country. The Russians are one of the largest producers of uranium in the United States. This is not widely known. That should make some people in Washington D.C. uncomfortable.
TMR: Is there anything novel that you’re hearing on conference calls or reports? Are there trends that the mainstream financial media is missing?
Chris Berry: One positive ongoing development in the mining sector is the evolution of cost reporting, especially by the majors. There’s always a lot of confusion around what it actually costs a specific company to get an ounce or pound of a commodity out of the ground. More detailed numbers are becoming more common through reporting of “all in sustaining costs”. These metrics aren’t perfect, either, but do give investors a clearer picture of a company’s cost structure. These metrics also have significant implications for the financials of a company. I pay particular attention when companies talk about changes in cost structure or tax rates, for example.
I also listen for clues to future growth projections. Specifically, where is a company seeing growth? In a number of the calls I have listened to recently, CEOs are becoming more optimistic about the prospects for the European Union. This is in stark contrast to recent quarters where the EU economic contraction has served to hurt company bottom lines. This trend appears to have changed and is an example of the type of analysis I do to come to the conclusion that the global economy has bottomed.
Another trend I follow concerns R&D spending patterns. R&D spending drives innovation, which leads to new products and ultimately to new markets. As integrated as global supply chains are, achieving “first mover” status with a new product or market can deliver immediate benefits to the bottom line. Diversification of revenue streams is also a positive. Gaining an understanding of different products and the amount and types of REEs a company uses can help gain a better understanding of the overall REE demand picture going forward.
A final indicator I look for in earnings calls is to make sure a company is maintaining or increasing market share. I want to see a company that is focused on being first or second in the world in a specific line of business. These are the sector leaders that typically have pricing power and have achieved economies of scale.
TMR: In parting, do you have any words of wisdom, or even a pep talk, for junior investors so they can keep their heads up and not miss the inevitable upswing?
Chris Berry: Don’t lose your nerve. This is a cyclical business. It always has been and it always will be. Across the entire commodities space we are going to need more of everything, not just to survive, but to prosper in the future. I still believe that the commodity super cycle is intact, despite the subdued commodity price environment. The super cycle looks as though it will become more consumption-centric rather than investment-centric.
Technology will also play a role. New markets will be created, spurred by R&D, and this will create opportunities for investors in and around the commodities sector. But it will be a stock pickers market. It’s not a market where you can just invest in XYZ graphite company and watch it appreciate in price. Going forward, a diversified portfolio of select companies across the right metals and minerals will serve the patient investor very well. It’s just a timing issue. Again, we’re at the bottom of the cycle right now: it’s time for voracious due diligence.
TMR: As always, it has been great to talk with you.
Chris Berry: Looking forward to speaking with you in the future.
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