Sustaining a Good Start

I always pay attention to the relative number of gainers and losers when updating stock prices in the Full Portfolio Table and this was the best ratio to date: 36 of the 42 stocks in the portfolio were up compared to the last time I printed the table, on December 15.

There were two reasons: uranium and gold.

I’ll start with uranium, where the spot price is up 8% in a few days. There are two related reasons: buyers returned to the spot market after a predictable holiday break to find uncommon violent political demonstrations across Kazakhstan, which produces 46% of the world’s uranium.

Today was the fourth straight day of protests in Kazakhstan. On Saturday the government deregulated the price of liquified petroleum gas (LPG), which many Kazaks use in their cars. The price immediately doubled and protests spread across the country. The president has since dismissed the prime minister and cabinet and imposed a state of emergency across several cities. Internet connectivity has also been largely cut off so updates are sparse.

Some social unrest in Kazakhstan is normal but a country-wide protest is a first, so there’s no knowing how long this could last. While the situation doesn’t directly impact uranium production, long-lasting protests could impact labour and supply chains. That would add pressure to mines that Kazatomprom, the state uranium producer, already warned will struggle somewhat in 2022 because of supply chain issues.

The potential for serious supply disruption lit a fire under uranium. Today alone the spot price gained US$3.88 to hit US$46.38 per lb., retaking all the ground it had slowly lost over December. Uranium equities responded by gaining 5 to 10% across the board.

The uranium price increase also lifted the Sprott Physical Uranium Trust to trade at a premium to its NAV, which allows the trust to buy more uranium. Remember, SPUT is the buyer of opportunity that has driven the price up by stepping in to buy with scale in a market lacking supply. Bottom line: the situation in Kazakhstan is a good reminder of how concentrated uranium supply is (46% from Kazakhstan!) and how utilities cannot tolerate threats to supply (they start buying as soon as supply security is threatened).

Uranium equities weren’t alone in gaining in the last three weeks. The end of tax loss selling combined with a gold price that stepped up over the holidays lifted gold equities too.

Is this the start of a Q1 rally? I want to think it is. Reasons in support:

• Inflation still hot. Rate hikes (starting May?) are increasingly certain but inflation is hot and so real rates are deeply negative.
• Lack of conviction the hiking cycle will last. The bond market doesn’t believe it. The parallels to China are starting to stand out. (Until omicron, China had been roughly six months ahead of the rest of the pandemic world and, with its economy strengthening and inflation rising, had raised rates. They are now stepping back.) Any sign that inflation is easing will be taken as reason to be rate dovish. Biden has three roles in the Fed to fill and is expected to tend dovish.
• Strong buying demand: Q1 elicits strong demand in China and India, central banks are buying, and indexes are set to buy ~2.2M oz. over the next week.
• Increasing questions about whether USD strength can persist if/as Asia and Europe recover from COVID.

But there are reasons for caution as well. Gold dropped to the bottom of its (tight) range today when minute from the last Federal Reserve meeting were released. I’ve complained about this before – it’s crazy that the market reacts a second time to the same information when the minutes come out!!! – but the market doesn’t care about my complaints. Instead, traders 4 responded like it was the first time the Fed acknowledged that inflation had reached the point of necessitating higher rates.

That annoying reaction – selling gold on the thought of rate hikes – will persist. And it will persist even though the forecast for 2022 I have the most confidence making is that gold will gain alongside rates for the first few hikes. It always does.

So were hikes set to start tomorrow, I would have more confidence that Q1 will work. Instead, hikes are likely to start in May…and be preceded by some gold price slide.

I think it’s likely that we get a gold rally for January and February. It won’t likely be dramatic, but I think the yellow metal could well show some strength over the next two months. Come March, those gains might well step back as the market starts to focus on that first rate hike in May. Once that hike happens, the path higher should be clear…though that’s five months out, which in today’s world is a long, long time (perhaps even into endemic, rather than a pandemic, time?!?).

I had all this in mind while selecting a portfolio for 2022, as outlined below. I included several leverage stocks – a mine building in Orezone and several mine planners like Integra and Revival – so that I’m positioned to take advantage of whatever Q1 rally we get. Exploration successes happen when they happen and so explorers have to be included when they are active; I have a good selection. And uranium is well represented because I strongly believe that 2022 will be bright for that commodity.