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Chart In Focus

Uranium and Gold, a Peculiar Correlation

 
Chart In Focus
 
May 28, 2015


You and I cannot trade uranium.  Saddam Hussein tried; it did not work out well for him.  So don’t try it.  Men will assuredly come and visit you if you do, and your life will become unpleasant.

But uranium has a price just like everything else, and you can track it at the web site for Cameco Corp., a uranium supplier.  Yes, THEY can trade uranium, while you cannot. 

This week’s chart highlights a fascinating correlation.  Gold prices as measured in dollars tend to move in sync with the price of uranium.  Who knew?  Last I checked, gold is not going out of style worldwide, but countries around the world are closing down their nuke plants in the wake of the 2011 tsunami in Japan that crashed the Fukushima nuclear plant.  Yet the price of the fuel for those nuclear reactors has not crashed in proportion.  Maybe the market is saying that the supposed worldwide abandonment of nuclear energy is like the rumors of Mark Twain’s death… greatly exaggerated. 

Or maybe there is another shoe to fall.  Uranium prices have a fascinating correlation to gold prices.  On the most simplistic level, this makes sense, since both items are mined from the ground, and both arguably have variable value.  But why should gold prices and uranium prices keep up such a strong correlation? 

I don’t have a good answer for that.  I have never mined an ounce of gold, nor any unit of uranium oxide (U3O8).  So I cannot offer you a good explanation for the “why” of this relationship.  What I can say is that chasing the “why” is often a fruitless exercise.  The chart says that there is a strong correlation, so who am I to argue?

Even more interesting, sometimes gold prices and uranium prices disagree.  When they do, it is usually the dollar price of gold that ends up being right about where both are headed.  This is similar to the instances when the euro price and the dollar price of gold disagree.  For that comparison, it is usually the euro price of gold that ends up being right. 

Right now, we are seeing a divergence between gold prices and uranium prices.  The implication is that the uranium market is pricing U3O8 up higher than is merited.  If gold is right about where both are headed, then that should mean uranium prices are going to head downward.

That is exactly what should be expected if the world is abandoning nuke plants.  That would be the consensus view.  And that very point is the only item giving me pause.  I usually like to rebel against the consensus view, whatever that view might be.  But gold is saying that uranium has no business still being up this high. 

If you somehow feel that you must play in this arena, the share price of Cameco Corp. does correlate pretty well to uranium prices.  That makes some sense, since the company deals in uranium. 

Uranium price versus share price of Cameco - NYSE:CCJ

Curiously, however, CCJ is not pushing up to higher highs like the price of uranium is doing.  Instead CCJ’s share price is following the path of gold prices in making lower highs and lower lows. 

Whether or not the abandonment of uranium as a fuel source is good energy policy is a wholly separate question, and one that I will leave to others to grapple with.  What I can say is that it surely is peculiar that gold and uranium should carry on such a relationship.  And I want no part of trying to trade it.

Tom McClellan
Editor, The McClellan Market Report


 
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