Top Advisors Corner

Uranium's Message For Gold into 2022

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The message from uranium prices is that gold prices are headed higher. And I have no idea why this relationship works.

Six years ago, I uncovered an interesting leading indication relationship, wherein the movements of uranium prices tend to show up again about 7 months later in the movements of gold prices. I cannot think of any reason why this should matter for gold prices, nor why 7 months seems to be the magical lag time. But my inability to divine a causal relationship does not take away from the obvious correlation, which has been working for at least a few decades now. At some point, when confronted with enough data, one stops worrying about the "why" of a relationship, and comes to accept the "is". 

Uranium prices have jumped a lot recently, as new meme stock traders have suddenly gotten interested in trading shares of the Sprott Physical Uranium Trust (symbol SRUUF on OTCMKTS, or U-U.TO on the Toronto Stock Exchange). This is like GLD for gold, with the trust holding physical quantities of uranium oxide (U3O8), hopefully in secure storage facilities. Traders are betting on a resurgence of interest in nuclear power and want to front-run that pickup in demand for the fuel source. They do not seem to be concerned with the 10-year average time to build a new nuke plant. What is not clear, however, is whether the trading in SRUUF is skewing the price of uranium and thus disrupting its message for gold prices.

If this new surge in demand for uranium is going to follow the historical pattern and flow through into an up move for gold prices, then the next 7 months (at least) look like a bullish time for gold prices. That's the message of this one chart. 

Unfortunately, the correlation between the two data plots is good, but is far from perfect, and there can be significant variation in gold prices from uranium's message without "breaking" the correlation. So while the up move in uranium prices is definitely worth noting for gold traders, one should not start counting ones' chickens yet about how much of an up move this has to necessarily mean for gold prices. 

Zooming in closer on this relationship, this next chart allows us to see the relationship in closer detail:

Here we can see more of the warts, and the missed moves. The correlation is still evident, and it is still real, but it is not perfect. 

With that said, an up move as powerful as this recent one in uranium prices really ought to matter over the next 7 months' worth of lag time for gold prices. Gold may or may not make as big of an up move as uranium's plot shows. But if we get the direction right, the magnitudes can take care of themselves.

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