• Uranium prices are soaring
  • But uranium stocks are not
  • Is it time to invest?

The uranium price is booming. And yet, nuclear power seems to be stuck in the doldrums. In fact, the amount of nuclear power produced worldwide fell over the past few years, according to Statista.

But there’s nothing like a lack of nuclear power to remind you of how much you need it. The Telegraph’s recent headline says it all, really: “Nuclear power output hits lowest level since 1980s as Britain faces cold snap,” and “Decline is likely to cause demand for gas to surge in a setback for UK’s net zero goals.”

Which carbon emissions zealot decided to replace carbon-neutral nuclear with carbon-emitting gas…?

It’s not just about a lack of new nuclear plants. The real issue is ageing old workhorses that need downtime and maintenance, especially in the UK and France.

Perhaps uranium’s boom is a sign that the world is waking up to the threat of ageing nuclear power plants. To increase the share of nuclear, as many countries plan to, they don’t just need to build a lot of new nuclear plants. They need to replace the existing stock that’s getting old. This is adding up to an immense build. And that means a lot of uranium demand, which the uranium price seems to be anticipating.

Before we get back to that theory, a warning…

Since I began my career in financial markets, they’ve been through a series of remarkable manias. At any point in time, there’s either a vast bubble or a devastating bust in some part of the stock market. And everyone seems to be focused on that particular segment.

These days, it’s the “Magnificent Seven” – stocks that are associated with the artificial intelligence boom. They were responsible for an eye-watering share of global stock market performance last year. In other words, if you owned them, you did well. If not…

Before the current boom, we had FAANGs, cryptocurrencies, the housing bubble and so much more. At each point in time, it seemed like there was only one story in town, and you had to be on the bandwagon or get ignored.

It sometimes feels more like writing about high school fads than high finance. Nothing highlighted this more than the GameStop drama of 2021…

Select, but innocuous, stocks suddenly began soaring on no real change of news. It was because small-time speculators had attacked Wall Street short sellers by bidding up stocks to levels at which those short sellers would have to cover their positions. When you’re short, exiting your position means buying back the stock, which only adds buying pressure and causes the price to spike even more. The resulting stock move, known as a “short squeeze”, can be spectacular, despite no real change in prospects for the underlying company.

As much as it was fun to see the rich and powerful get a bloody nose, this was old-school bullying, not investing. Nobody cared about what the stocks actually did for a business. Nobody cared about what value the stock should be priced at. They cared about using the stock market’s idiosyncrasies to lynch rich people.

I’ve often wanted to ask more experienced observers of financial markets whether this state of affairs was always so. Was their day-to-day life in the markets always determined by irrational manias? Did whatever set of asset prices, which happened to be soaring beyond all sensible valuation or crashing back down to earth, define their careers all the time too? Or was there a more respectable and reasonable past in financial markets that we might someday return to? A place where valuations, not momentum, matter.

The history books are not encouraging. In fact, they prefer to focus on the same sorts of dramas. You’ll find the Tech Bubble, the Roaring 20s, the Tulip Bubble and so much more.

Given all these goings on, it amazes me that politicians thought it’d be a good idea to plough the nation’s retirement savings into something as fickle as the stock market. Why not try something stable and respectable like Pokémon cards or Rolex watches instead?

I’m convinced that financial market manias are not caused by random surges in human behaviour or delusion. They have a root cause that triggers greed to overcome fear, before fear eventually gets the upper hand again.

But nobody wants to hear about that. They want to make money from the boom, not hear why the bust is inevitable!

One investment that often fluctuates between bubble and pop is uranium. It’s been through a series of wild spikes and devastating crashes in its history. And there’s no doubt about which one of the two we’re in right now.

The price of uranium has now doubled since the beginning of 2022. The UK-listed uranium ETF Yellow Cake (LSE:YCA) is up 80% since I recommended it to my subscribers back in 2021, although we sold out for a 50% gain.

Yes, I recommended participating in this bubble, despite its likelihood of an eventual bust when the mania ends. That’ll be with the realisation that valuations are off the charts and must be corrected in a crash. But there was a clear valuation rational back in 2021…

The narrative for the uranium boom was, of course, obvious, especially in hindsight. The world needs affordable and safe baseload power that can easily be stockpiled to guarantee energy security. Preferably without the carbon dioxide you might expect from those prerequisites.

Not much in the power generation world ticks all those boxes. And so, the environmentalists of the world would eventually have to unite with their former public enemy number one: nuclear power.

That has certainly happened over the past few years, with a long and growing list of countries recommitting to a nuclear power future. Hence, the uranium price is up… right?

I’m not so sure that’s what’s going on. At least, not yet.

Nuclear power takes decades to go from planning to power. So the recent boom in interest in nuclear power can’t be the key factor in the uranium price spike.

Even if we account for the unexpected elements, such as the earlier recommissioning of nuclear reactors in Japan, demand is unlikely to be behind much of the boom.

Part of the answer certainly lies in supply, but there’s a lot going on there.

Russia is a key part of the uranium supply chain. And it hasn’t been a good few years for supply chains, nor for Russian export businesses…

Quite a lot of uranium mines were put on ice over the past few years because of a glut, low prices and a lack of demand. This means the price spike we’ve seen could easily be met with more supply. But, so far, major uranium producers seem hesitant to do so. They are demanding higher prices to begin bringing serious production back online. This is because costs are higher, but it suggests that the price spike will eventually be met with plenty of available demand.

Another peculiar aspect of uranium mania is that uranium stocks have not taken off. They’ve been largely flat since the latest price spike began, despite the recent parabolic shape of the uranium price curve. Equally, they didn’t benefit from the brief uranium price spike when Russia invaded Ukraine in 2022.

Why not?

Uranium miners like to sell their product in longer-term contracts in order to gain predictable and reliable cash flow. Often, the banks and other lenders funding the project demand this state of affairs.

It’s also good for uranium buyers because it creates a predictable cost and revenue scenario right up the complex supply chain, all the way to the power utilities that buy the final product. All the way to your power bill, theoretically. Nuclear power’s long-term, predictable cost structure is one key benefit. In fact, uranium is only a small part of the total cost of running a nuclear power plant.

That’s why, I believe, investors hoping to benefit from the nuclear power boom should look outside of uranium stocks to find their perfect match. The revenue concentration will be in the construction of a vast number of nuclear plants in the next few decades rather than the uranium supply curve.

That’s not to say the current uranium boom is on its last legs, just that it’s another uranium mania. Enjoy it while it lasts, but don’t expect it to avoid the bust.

Oh, and if you’d like to discover which asset class could be the market’s next darling, my friend Sam Volkering would like to show you here.

Until next time,

Nick Hubble
Editor, Fortune & Freedom