Published on Sunday December 01 2013 (AEST)
Remember, "bad to less bad" situations are an incredible source of low-risk profits...
"Bad to less bad" is a phrase coined by True Wealth editor Steve Sjuggerud. It involves buying assets that have suffered through horrible times...
In this kind of "bad" condition, you can often buy an asset for well below "normal" levels. If you step in and buy amid the pessimism, you can double your money if a bit of optimism returns to the market.
That's the situation right now in Uranium
Uranium fuels nuclear power stations... And like most commodities, it enjoys huge "boom and bust" cycles.
From 2003 to 2007, uranium saw a huge boom. It ran from $10 per pound to $130 per pound. And the share prices of uranium producers skyrocketed. Canada-based producer Cameco, for example, returned more than 1,200%.
But in March 2011, the disaster at Japan's Fukushima power plant helped turn the boom to bust. Japan was one of the world's biggest consumers of nuclear power, and it shut down more than half of its reactors. Several other countries also scaled back their nuclear programs.
While global sentiment has since improved, the damage was done. Uranium prices now sit at about $36 per pound... their lowest levels in more than seven years.
Right now, uranium producers need to sell their product for about $75 a pound to break even... That's more than twice the spot-market price. In other words, most producers are losing money on every pound of uranium they sell. Eventually, some of them will be forced to shut down.
In short, it's "bad" for uranium right now. Take it from Rick Rule...
Rick is the founder of Sprott Global Companies and chairman of Sprott U.S. Holdings. He has spent decades in the resource markets, making himself and his clients many millions of dollars in the process. He has also financed several of the most important resource companies in the world.
He's a brilliant trader, a genius investor, and a walking encyclopedia of business knowledge.
Here's what Rick told our colleague Frank Curzio in a recent episode of Frank's excellent S&A Investor Radio podcast:
The industry is in fact in liquidation. It sounds like it couldn't possibly get any worse, so sentiment with regards to uranium is really, really bad.
It might be hard to stomach the thought of buying uranium here. But as we've noted in these pages before, when things can't get any worse, they can only get better.
And Rick believes a double in uranium prices is a "near certainty."
Uranium Participation Corp. tracks the spot price of uranium (like GLD does for gold). In the chart below, you can see the big 2011-2012 bust. But you can also see that it has "ground out" a bottom at around C$4.80. Over the last year, it has refused to fall below that level.
You can also see that in the last three weeks, it has gained 12%. On Friday, it hit a new four-month high.
There's no guarantee this is the start of uranium's recovery. But the upside potential is enormous. And it's inevitable. It might take a year... or two... or three to play out. But uranium prices will head higher.
Keep in mind, it doesn't take great news to double the price of a cheap, hated asset... things just need to go from "bad to less bad." And it looks like that's starting to happen in uranium.
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