Is uranium turning out to be the hottest commodity-hotter than gold-in China? China has been trying to amass gold reserves to emerge as the largest yellow metal owning country in the world. But China's craze for commodity investment does not just stop by gold alone. Uranium is one commodity that the dragon country is heavily investing in these days.

According to Thomas Neff of the Massachusetts Institute of Technology, China will double the amount of uranium it stockpiles this year, to 5,000 metric tons.

He said China is stepping up investments in uranium as part of its push to develop nuclear power on a massive scale, and state-owned companies have already been scouting uranium investments abroad.

Countries have been investing in uranium in the wake of new nuclear power plants that are coming up across the world. Combined with the fact that America is considering new nuclear power plants as well, uranium bulls have reason to be more excited these days.

Uranium prices are well below the levels of last year.

China has a relatively small position as far as gold reserves are concerned. The Chinese central bank--the People's Bank of China--holds only 1,054 tons of gold, amounting to just 1.2% of the country's gross domestic product. The large chunk of China's reserves--around 70%--are held in US dollars.

China has been nursing ambitions to step up its gold reserves in the last one year, driven by the declining value of US dollar that the Chinese central bank holds as foreign exchange reserve. China also continues to aggressively promote gold investment. Jewellery shops continue to sprout across Chinese cities, towns and rural areas.

A recent report from the World Gold Council (WGC) said that gold demand in India and China will continue to grow driven by jewellery demand, in spite of high local currency gold prices. In Q1 2010, India was the strongest performing market as total consumer demand surged 698% to touch 193.5 tonnes. In China, demand proved resilient; demand increased 11% in Q1 2010 to 105.2 tonnes.

Analysts like Neff say that China is China is aggressively stepping up investing in uranium reserves in US dollars, competing with gold as an asset in the process.

Recently global analyst Merrill McHenry had this to say on uranium:

If investors had to watch one thing in the uranium market, it would be the uranium term price. That is the long-term contracting price for uranium suppliers and (utility) buyers. Over time, the spot and term prices will tend to converge (i.e., if the spot price drops too far below the term price, utilities will purchase additional inventory and store it).

The spot market is more illiquid than most think; and it is far from realistic for the sector to be affected by minimal spot volumes-sometimes they are as low as one or no transactions. In effect, too often the small tail of the spot market wags the dog (sector). Investors need to look at the big picture of the sector, and it is fine.

The 'truth' on uranium is the secular (long-term) bullish case never went away-people and human behavior just accentuated a cyclical (short-term) correction. It's human nature that people overreact and chase prices on the way up, and, while in a panic, bail shares on the way down. I have been on both the buy and sell-side and I know how people do not want to buy when they should-and vice versa. (It is called group think.) Human nature also has people mistakenly thinking in absolutes, when in the end most things are relative. Even experts do this. These factors often wrongly affected investors' perspectives, and I would say this was the case with the uranium sector. Investors should remain objective as well as aware of this.

Uranium's spot market massive price rise from its long-term range in the $10 range was a parabolic moon shot to $138. I keep telling people any asset (i.e., commodities) that does a parabolic price rise is going to have a crack in the vertical price rise [note the chart] where the meddle of the bullish thesis will be tested. That is the time to see about the real secular case.

Technically speaking, giving up one-third or two-thirds the parabolic price rise frequently happens, just as stocks may have similar cyclical rally retrenchments. If the secular case really exists, then the asset will hold a new pricing equilibrium and a new paradigm exists; the asset will not fall back to the previous trading range. Low and behold, uranium did not fall back to the previous multi-decade $10 range; a new supply and demand equilibrium was established in the $40 range-off approximately two-thirds from the parabolic high.

China stepped in, filled its North American and European storage contracts, and started taking physical delivery. India stepped in, and the utility spot buyers resurfaced. We have endured the highest spot market volume in 13 years of TradeTech data this year from the remaining financial players liquidating inventories. We are over 20% ahead of the next closest record and yet the new uranium floor is over four times higher than the previous paradigm. This is where you see the secular bullish case. The new uranium pricing paradigm held and a new floor was put in place for a new bullish cycle within a secular bull market. This is when one should start buying aggressively. There was a selling exhaustion on the stocks-the good thrown out with the bad-and the sector was/is oversold versus its long-term fundamentals.

The bottom line is the vast majority, if not all, nuclear reactor construction projects have gone ahead. Those are in China and India, and they are either state or quasi-state sponsored projects. Moreover, this year China added three new reactor projects, to 24 under construction, with its stimulus funding. China currently has only 11 nuclear reactors.

People's tendency to think in absolutes misses the real point about demand growth-over the last year, what the private sector took (if any), the public sector more than gave. Largely, unlike other commodities, the credit crunch effects on the private sector did not hit uranium's fundamentals. I am minimally concerned if U.S. reactor projects are delayed because those are 10 to 12-plus year project completions. What I do care about are China and India's (Chindia) much nearer term reactor projects-those are four to six year and current uranium demand situations, respectively. Those are the main uranium secular drivers-and the truth is both actually got better.

The U.S. private sector projects have always been awaiting Congressional and DOE loan guarantees. They still are. In my book, the U.S. if of incremental uranium demand is so far down the road as to be of minor investment consequence.

Theoretically, any investment's value is the net present value of the future cash flows. The sector's cash flow changes due to Chindia's changes in uranium demand in five years, and currently, is of far greater investment value than potential changes in U.S. uranium demand 12 years hence. Typically, those outlier years are of minimal impact on TradeTech's uranium pricing forecast models as well.

I want to emphasize that the only thing better than bullish supply and demand factors are exogenous events. Both China and India have recently had favorable exogenous events that will greatly affect uranium demand. Both are seeking to buy well beyond current needs.

Only this year India entered the spot market after a 34-year Nuclear Suppliers Group embargo (due to India's 1974 nuclear test and refusal to sign the Non-Proliferation Treaty). India is not only seeking uranium for it is current needs, but also after years of shortages and a strong national sentiment towards nuclear sovereignty, is seeking to buy sufficient uranium for all reactors for the entire service life of those reactors. Needless to say, that is and will be quite a bit of additional uranium demand. Investors should note, that was not factored in the market one year ago; it is a new and significantly bullish event.

Korea also has good sector news. Korea Resources Corp. expressed they are seeking a US$1 billion uranium mine.

So, we have had three major future uranium players-India, China and Korea-come forward with billions of dollars in additional uranium demand over the last year; and actually increasing reactor builds over plans. The uranium sector has had nothing bearish in the last year even close to those bullish factors.

As for uranium supplies, the continuing theme of 2008 was lowered production guidance becomes a norm. My total of production cuts for 2008 was 4.7mlbs, which by way of relative comparison was roughly two months of a typical year's spot market volume. At the margin, that is a bullish number as well. Also, people do not realize the rate of existing mine depletion. Based upon current estimates, by 2020, six of the world's top 10 uranium mines will be depleted, and the top two mines will be entering the latter stages of production.

In summary, while many unknowingly ditched the sector, arguably the uranium space has a better price floor and verifiable new pricing paradigm in place than most-if not all-commodities. To use the street phrase, for uranium what has transpired in the last year-It's all good. The exogenous events significantly boosting uranium demand for China and India are far greater than the minimal and distant ifs of private sector reactor delays. Not to mention China has actually boosted reactor construction; while India made no delays and entered the world market.

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