Uranium Shares To Show Gains in Face of $120 Oil

Perhaps the massive blow-up and run-down in uranium shares last year has left your memory. Uranium producers have certainly not been popular of late. There are two uranium companies whose fortunes could be about to change. But to understand why, you should know the full story of uranium.

The uranium price from last year reminds us a bit of when Jack tossed those magic beans out the kitchen window. Zip. Pretty soon a massive growth had burst out of nowhere.

But the seeds of Uranium Boom 2007 were sown years ago, back in the ‘90's.

For the entire decade of the 1990s, fossil energy was cheap and accessible and abusable. Crude oil crouched below US$30 until the turn of the millenium. The service station down the road was charging you 67 cents a litre for a tank of petrol. The gas that lights your stove and heats your home was a quarter the price it is now.

With everything was so cheap, who could care less about nuclear power?

Certainly not elected officials. They had little choice. What government would incur the wrath of environmentally conscious citizens while heating oil and gas prices are so low? No-one wanted to swap their nice fat oil cow for a handful of silly magic beans. Especially not magic beans that cause radiation poisoning.

So the beans were discarded on the back lawn. Nuclear infrastructure development stagnated. Europe dropped many of its planned projects. US policymakers wouldn't touch the issue. Gas flared, stovetops bubbled, coalfires raged.

Eventually, those beans sprouted, though. Oil has become five times as expensive since the year 2000. Policy-makers and planners have begun to realise that gas is finite. Coal, the other source of base-load electricity, is now copping flak for carbon emissions. In China these days, 60% of big cities have air quality below acceptable limits. Two billion people are going through rapid industrial development in Asia. How can cities keep the lights on without gas or coal?

Countries have changed their tune in recent years, especially developing nations with massive future energy loads to bear. China plans to take its nuclear energy load from 2% of total power to 8% in the next 15 years. To do that it'll have to build two nuclear reactors per year. India wants to double its own nuclear capacity over the same period.

All this nuclear power is going to need uranium fuel. Last year, investors realised this. So the nuclear beanstalk grew. Uranium prices boomed at exponential rates. It spiked at a price of US$140 per pound. Then it crashed.

Despite the crash, you know that sooner or later, uranium demand is going to fire up again. That's what makes the following uranium shares look especially oversold.

First up, Paladin Energy (ASX:PDN) has fallen a long, long way from its high of last year. From a long-term perspective, this chart is really interesting. This uranium company's share price recently rebounded from a low of AU$4.28 on April 14th. This corresponds exactly with a 61.8% Fibonacci retracement. It also matches up with long-term support established back in 2006.

The stock looks as though it may have taken a beating. But technically speaking, that beating may be overdone. Uranium has only fallen a little over 50% in the same period. With this new support, many investors will see this as an opportunity to buy back into uranium shares. It could grant Paladin a new bullish momentum.

Energy Resources of Australia (ASX:ERA) is another uranium miner we like the look of at the moment. Technically, it's also strong, but for different reasons than Paladin.

Since August 17th 2007, the share price has gained 38%. You can see this bullish trend clearly in the brown line on the bottom half of the graph above. The stock is currently trading just above the support line, with a positive outlook on the near-term. Traders have rarely been brave enough to venture below that brown trend line.

We don't think they will now. But also, the MACD indicator on the top half of the graph shows an "upward cross". The full brown line has crossed the dotted black line. This is a bullish signal for momentum traders. It's confirmed by action in moving averages; the 10-day moving average is about to cross above the 20-day moving average.

That adds to the argument for ERA's shares. The stock is simultaneously finding support, and getting two green lights for a turnaround. Now could be the time that these two uranium shares find their bottoms before a long-term bull market.

Gabriel Andre
The Daily Reckoning Australia

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