With 2006 fading in our rearview mirror, it’s a good time to look at the road ahead. Today, I’m going to tell you what I see for gold, energy and uranium in 2007.
I expect another great year for natural resources. Reason: There’s a quiet war going on right now … a global battle for natural resources that will probably define the 21st Century.
In short, we’re in the middle of a global commodities supercycle. Prices of many natural resources have gone up in the last few years, but they should go much, much higher. Prepared investors stand to make big profits …
Gold Ready to Rocket
In the New Year
Gold hit a 26-year-high on May 12, and posted a very solid 23% gain for the year. And from the beginning of 2005 through the end of 2006, the yellow metal rose 48%.
What does 2007 hold? Here are some things to watch for …
First, gold companies will continue merging and making acquisitions left and right.
In 2006, we saw the most M&A activity in at least a decade. There were 357 deals valued at $24.3 billion … way more than the $16.2 billion in deals a year earlier.
Why the sudden flurry? For the simple reason that mines are being depleted faster than new reserves can be found. The number of discoveries with 2.5 million or more ounces has declined for eight straight years, according to the Metals Economics Group in Halifax, Nova Scotia.
If anything, I expect the M&A feeding frenzy to get more frantic in the year ahead.
Second, mining production will still fail to keep up with demand.
Despite rising gold prices, global gold production in the nine months ended September fell 2.2% to 1,804 metric tonnes from a year earlier, says London-based researcher GFMS Ltd.
Third, exchange-traded funds (ETFs) will keep sucking up gold!
Last week, the streetTRACKS Gold Shares, the largest gold exchange-traded fund, added another 1.2 metric tonnes of gold to its horde, raising the total to 453.24 metric tonnes.
The previous week, it added three metric tonnes. The week before that? Another 7.4 tonnes. That’s more than 11 tonnes of gold added in 21 days! Wow!
Globally, a total of 560 tonnes of gold is being held in six ETFs. Investment demand for gold is growing — and it will be a huge force in the market going forward.
My take: We’re seeing investment dollars “buy the dips” in gold. Many investors are looking ahead, so they’re allocating money to ride the wave they see coming.
Fourth, the dollar will fall further, helping gold prices rise.
In 2006, the once-mighty greenback fell 8.1% against a basket of six currencies such as the euro and yen. That was its fourth annual decline in just five years.
Sure, the dollar has enjoyed a short-term bounce since November, but the larger downtrend should reassert itself soon. Indeed, it wouldn’t surprise me to see the euro rise another 10% against the dollar by the middle of 2007.
Add it all up, and you can see why the bullish trend for gold should continue. Since 1800, the industry’s boom and bust cycles have averaged about 10 years. However, the last downward trend lasted 14 years (from 1986-2000). So I think we’re only about halfway through the current upward cycle.
My short-term target for gold is $700. That’s a 10% move from current prices. For the full year, I expect gold prices to average $750. And I wouldn’t be surprised to see a spike to $800 per ounce if geopolitical forces boil over.
Energy in 2007:
Bargains Abound!
Despite some big upward price surges, the shares of many energy-related companies are still dirt-cheap. As you can see from the graph, major integrated oil and gas companies carry an average price-to-earnings ratio (P/E) of just 8.6, and other sub-groups are similarly valued.
Compared to the 21.2 P/E for the S&P 500, which is a good proxy for the broad market, almost all of these energy groups look way, way undervalued.
Meanwhile, the fundamental forces driving oil prices may have taken a holiday break, but they haven’t gone away. Here are four of them:
1. Demand should ramp up. We’re seeing very strong demand for everything from diesel to heating oil. Gasoline use is rising at a slower pace, but still growing.
Global oil use hit 84.5 million barrels per day in 2006, and should average 85.9 million barrels per day in 2007, according to the International Energy Agency. That’s more than 59,600 barrels a minute!
2. Geopolitical risk could increase. The geopolitical risk premium has been squeezed out of oil in recent months. But I expect it to be pumped back in as tensions heat up with Iran, which is bah-humbugging the UN’s latest directive to stop its nuclear program.
The U.S. and Britain are moving ships and warplanes to bases near Iran, and President Bush is talking about the country the same way he talked about Iraq before we invaded.
And there are other geopolitical risks that aren’t even on a lot of radar screens. For example, Angola, Ecuador and Sudan all want to join the Organization of Petroleum Exporting Countries (OPEC). This could impede foreign investment in the three countries.
3. OPEC cuts should filter into the market. OPEC recently announced it will cut supply by 500,000 barrels per day (bpd), or 2%, effective February 1. That follows an earlier cut of 1.2 million bpd agreed from November 1. These cuts will take excess supply off the market.
4. Supply remains tight. The Western oil majors — like ExxonMobil, Chevron, BP, and Shell — are failing to replace the reserves they pump. In 1997, they were able to replace 140% of their reserves; in 2005, they were able to replace only 75%! This indicates just how hard it’s becoming to find oil.
Production in the North Sea has peaked, and so has Kuwait’s giant Burgan oil field. Mexico’s giant Cantarell field is heading toward a collapse — production there should fall 14% a year, starting with 50,000 barrels per day in January.
Remember, America has 5% of the world’s population, yet consumes 25% of Earth’s energy. And two-thirds of that energy is imported. Unless the economy slips into a recession, I think oil will hit $80 per barrel in 2007.
Uranium: Another Great Year
Ahead for the White-Hot Metal
A typical one-gigawatt nuclear reactor requires around 200 metric tonnes of natural uranium per year. Last year, the world consumed around 78,000 tonnes of uranium. Current world supply from mines is around 48,000 tonnes per year.
Much of this supply-demand gap is made up of material from Russian nuclear warheads, a program called “Megatons to Megawatts.†This program ends in seven years, and the Russians believe (rightly so) that they’ve gotten a raw deal. I doubt the arrangement will be renewed. After all, Russia has an ambitious nuclear program of its own …
Russian President Vladimir Putin wants to boost nuclear’s share of Russia’s energy use to 25% by 2030 vs. 15% currently. To get there, the country will have to add 40 gigawatts of nuclear energy each and every year. That means at least 42 new nuclear reactors … perhaps as many as 58!
And it’s not just Russia building new plants:
- China plans to construct two new 1,000-megawatt nuclear reactors each and every year, including two coming online this year. That works out to 30 new nuclear plants by 2020.
- Japan, South Korea, India, France, and many other countries all have ambitious nuclear programs, too. Worldwide, there are 442 nuclear reactors in operation, and about 251 more in the works, according to data from the World Nuclear Association.
- The U.S. gets about 20% of its power from 103 nuclear power plants … that makes us the world’s largest generator of nuclear power. Recently, there were 29 pending requests for licenses to construct new nuclear power plants on American soil. As existing plants reach the end of their design life, I think we’ll see lots of new plants sprouting up.
Unfortunately, even though there’s new demand, supplies are falling far short.
One problem is flooding at uranium kingpin Cameco’s Cigar Lake mine. The mine was going to go online in 2008, producing seven million pounds of uranium that year, then 18 million pounds a year thereafter.
Before the Cigar Lake disaster, uranium demand was already expected to exceed supply by 25 million pounds in 2008. With Cigar Lake out of commission, that gap will now be 32 million pounds. In other words, the shortfall in uranium is going to soar by 30% just in 2008 alone!
Utilities and other big uranium consumers see the squeeze coming, and they’re racing to secure supplies. That’s why spot uranium prices recently soared above $72 per pound, basically doubling in the course of a year.
Yet on a historical basis, uranium is still quite cheap. In 1978, uranium topped out at $43.40 per pound. Adjusted for inflation, that’s around $145 per pound in today’s dollars.
Bottom line: My target for uranium is $100 per pound in 2007.
Last Chance to Get
My Top Uranium Picks
Given soaring uranium prices, it’s no surprise that uranium stocks have been blasting off.
Just take a look at what the recommendations in my Uranium Fever: White-Hot Metal and Cold Hard Cash report have done! I sure hope you bought it and jumped on my picks. As you can see, these stocks are up 40% … 75% … even 109% since my original recommendations!
Are these shares still buys? Heck yeah! If you bought the report but didn’t act on all the recommendations, feel free to add during any short-term weakness. The fact that uranium hasn’t pulled back once — not even flinched — during its rocket ride means this is likely one of the biggest bull markets in history!
So what we’ve seen for these stocks is just the tip of the iceberg. Indeed, I believe they’ve only just begun to make the moves they are going to enjoy over the next three … five … ten years or more!
If you’re ready to step up to the plate for what should be the most profitable time in uranium’s history, you can find out more about my 47-page report, Uranium Fever: White-Hot Metal and Cold Hard Cash, by contacting us at 1-800-400-6916 and we’ll send you a PDF copy so you can jump on these red-hot recommendations right away.
But hurry! I am going to stop selling this report on January 15. Why? Because it’s almost time to send out the first of the three follow-ups I promised to send to anyone who bought the report.
If I’m right, 2007 will be another spectacular year for natural resources investments, particularly uranium! Don’t miss out!
Yours for trading profits,
Sean Brodrick
P.S. Be sure to get the latest on gold, energy, uranium, and more on my blog at http://redhotresources.blogspot.com
About MONEY AND MARKETS
MONEY AND MARKETS (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Sean Brodrick, Larry Edelson, Michael Larson, Nilus Mattive, and Tony Sagami. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Regular contributors and staff include John Burke, Amber Dakar, Wendy Montes de Oca, Kristen Adams, Jennifer Moran, Red Morgan, and Julie Trudeau.
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