With Grant Williams

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Uranium Shares Will Go CriticalDear Reader,

There are few issues more certain to cause lively debate than nuclear energy. It’s something that polarizes opinion like little else and, since the tragic events in Fukushima, Japan last year, when an earthquake and tsunami caused catastrophic damage to an ageing nuclear power station, the nuclear debate has raged anew, as Germany and Italy have vowed to move away from nuclear power and towards a greener future.

So that’s game over for the nuclear industry, right? Well, maybe not.

Nuclear power is still very much alive and kicking in China, India, and many emerging nations that aren’t about to move away from clean, cheap power anytime soon, as they scramble to find affordable ways to generate enough electricity to fuel what feels like the only hope the world has for growth right now.

Throw in an impending supply shortage of yellowcake uranium as Australia’s BHP decides to shutter the expansion of what would have become the world’s biggest uranium mine, and you have a recipe for higher prices that may soon attract plenty of investors to the beaten-down uranium mining sector.

Emotional decisions are never a good idea when looking at investment opportunities; and so this month Chief Investment Strategist Grant Williams explains why you should look past the headlines, set emotion aside, and assess the reality of a sector that the world simply can’t do without for the foreseeable future – a sector in which he sees one particular stock standing head and shoulders above the rest, offering the kind of investment case that Bull’s Eye Investors will find compelling.

John Mauldin Chairman Mauldin Economics

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Uranium Shares Will Go Critical By Grant Williams

Ever since December 20, 1951, when the Experimental Breeder Reactor EBR-I in Arco, Idaho, USA, became the first nuclear facility to produce electricity – illuminating four light bulbs – nuclear power has been at the center of a raging debate about its stability. Five years later, on June 26, 1954, at Obninsk, Russia, the nuclear power plant APS-1, with a net electrical output of 5 MW, was connected to the power grid, making it the world’s first nuclear power plant that generated electricity for commercial use.

Almost 60 years to the day since EBR-I illuminated those four bulbs in Arco, the nuclear industry’s future is once again under a cloud (for want of a better phrase).

I have been following uranium for a number of years now – even more closely in the wake of the terrible events in Japan last year – and the dynamics of the industry are fascinating, to say the least. Whenever you find investment ideas in areas where human emotions run high, you can guarantee that at some point in time those ideas will travel to the two extremes of the fair-value scale.

The last eighteen months have seen the uranium industry take one such journey, as the fallout from the earthquake and tsunami that swept through Eastern Honshu has decimated uranium-producing stocks and, to a lesser extent, certain power companies that rely on the miracle of nuclear energy to provide electricity to their customers.

Immediately after Fukushima, the share prices of most uranium producers were cut by more than 60% by a market that feared for the future of the nuclear industry. Shortly thereafter, as the sector began to stagger to its knees once again, Germany threw a rabbit punch when it announced plans to phase out all 17 of its nuclear reactors by 2022.

Obviously, the news that one of the world’s industrial powerhouses would be shutting its nuclear plants for good sent the uranium sector to the canvas once again – bleeding profusely – and there, by and large, it has stayed.

However, if we take a look at some of the facts surrounding the nuclear industry, there are many reasons to think that, once the emotional elements of the situation recede, to be replaced by more logical ones, things may change significantly.

According to the International Atomic Energy Agency (IAEA), there are currently 440 nuclear reactors operating across the world, with a further 65 in various stages of completion, including 27 in China, 11 in Russia, and 5 in both India and South Korea.

These power stations, both existing and new, will require uranium in order to provide the roughly 400 GW of electricity demanded by a world that is becoming ever more dependent upon the provision of energy to power its continued urbanization.

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Dr. Michael Dittmar, a physicist at ETH, Zurich, and working at CERN in Geneva, recently wrapped some clear-headed analysis around the nuclear industry, for those willing to ignore the hyperbole that has swirled around uranium for the last 18 months:

Operating nuclear reactors require the equivalent of about 68,000 tons of natural uranium ore every year. Yet, over the past 20 years, no more than 40–50,000 tons of uranium ore have been extracted annually from mines around the globe. Even taking into account accumulated stocks, demand for uranium could soon exceed supply, especially if the number of plants doubles by 2030. If nuclear power is no more sustainable than fossil fuels, what does that imply for our energy future?

A valid question indeed.

In search of an answer, Dittmar first proceeded to establish some cold, hard facts about uranium – and they are compelling, to say the least:

About 97% [of the world’s extracted uranium ore] comes from just 10 countries and 85% from 26 mines. The three largest uranium-producing countries are Kazakhstan, Canada and Australia, in descending order. Together, they produced about 63% of the total in 2009. The next three, Namibia, Russia and Niger, together produced 23% and another 11% came from Uzbekistan, the USA, Ukraine and China.

The largest mine in Canada alone produces about 15% of the world total. The three largest mines together extracted about 31% of all uranium in 2009 and the 10 largest mines 59%. The next 16 mines together produced another 25%. Thus, global uranium production is closer to a monopoly than any other energy source today.

About 30% of nuclear fuel currently comes not from mines but from an obviously unsustainable source, civilian and military uranium stocks accumulated during the Cold War and, to a much lesser extent, from fuel reprocessing.

Before the accident in Japan, several countries were planning to construct a large number of nuclear power plants in the coming 20 years, the most ambitious plans being presented by China (see graph). If all these projects can be realized in time and only a few of the ageing nuclear power plants are closed by 2030, the number of plants worldwide will nearly double, requiring a similar increase in uranium mining.

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Dittmar proceeds to explain the supply/demand situation of uranium, painting a picture of a lack of the former and a surplus of the latter:

... one should distinguish between the known deposits of about 4 million tons of assured uranium and the 2.3 million tons of inferred extractable uranium. Given that one-third of the “known” deposits are only an estimate, a more accurate interpretation would be that perhaps enough uranium exists to operate the existing nuclear power plants for about 70 years...

... essentially three scenarios have been considered for the future of nuclear-produced electric power: a so-called fast-growth scenario of more than 2% a year, a reference scenario of 1.5% growth and a constant or slow phase-out scenario of -1% capacity per year. If we choose the reference scenario of 1.5% growth, annual uranium requirements in 2030 would come to circa 90,000 tons, about 35% more than today.

Assuming a totally unrealistic growth scenario of, say, 5% per year, about 180,000 tons of uranium would be needed to fuel nuclear power plants in 2030 and the “known” uranium resources would be exhausted by about 2047. It is important to realize that even a 5% annual growth scenario would still result in nuclear power contributing only about 2.5 times more nuclear energy by 2030 than today. Assuming that all other fuel types remained at 2010 levels of 86% of the total electrical energy mix, this unrealistic increase would still only provide about 30% of electrical energy in 2030.

So clearly, unless a viable alternative to nuclear energy can be found – and quickly – the world’s stockpiles of uranium will soon be irretrievably depleted (irresistible uranium-based pun there – sorry).

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The realistic chances of the world giving up on nuclear power anytime soon are close to zero – we are just not ready to abandon a power source that, despite the post-Fukushima hysteria, is infinitely cleaner and has killed far fewer people than, for example, coal over the years.

The number of deaths that have resulted from coal mining is staggering – particularly when coal’s effect on the environment is considered – but it fails to garner anything like the attention that deaths from any kind of nuclear accident generate. A look at the number of coal mining-related deaths in the US and China over the past 30 years proves this point dramatically (table at right).

But back to uranium and Prof. Dittmar’s thoughts on whether nuclear energy affords the countries that use it energy independence:

... sooner or later, the Japanese nuclear disaster will be forgotten and the argument of energy independence will resurface. Yet, just how independent are France and the USA? Many countries import close to 100% of their uranium needs today; this is especially true for the USA, France and the rest of the European Union. Thirty years ago, the USA produced about 16,000 tons of uranium ore annually; today, that has declined to less than 2,000 tons, whereas its power plants require about 20,000 tons. Thus, less than 10% of their needs are satisfied by mines on their huge territory.

So both the USA and France (along with the rest of the EU) – some of the largest users of nuclear-generated electrical power – are already dependent on foreign largesse to supply them with the uranium they require to fuel their existing nuclear power plants. Competition for this fuel is only going to intensify as more reactors come online in the next decade. China’s increasing demand for a commodity that is largely produced in extremely China-friendly jurisdictions such as Kazakhstan, Australia, Namibia, and Russia may prove troublesome for the US and Europe, as they come to rely more heavily on Canada’s good graces.

But there is one other aspect of the tightening supply dynamic that is particularly curious when viewed from a US perspective; and that is America’s reliance upon, of all places, Russia to supply the necessary uranium to keep the home fires burning.

Professor Dittmar explains:

It is especially interesting to note that 50% of US nuclear reactors are currently running thanks to the goodwill of the Russian government, via a contract that expires in 2013. Every year, the USA has to import about 10,000 tons of natural uranium equivalent nuclear fuel from Russian military reserves. This dependence on uranium imports has become much stronger in recent years because many US mines have been depleted and the country’s civilian stocks of uranium have essentially been used up.

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The US relying on a contract with Russia that expires in a little over a year to provide them with 50% of their uranium needs, from decommissioned nuclear weapons? That alone sounds like the foundation for a Tom Clancy novel; but throw into the mix China’s increasing desire to secure uranium supplies, plus India’s growing power sector and that of the UAE and, despite the horrors of Fukushima last year and the subsequent knee-jerk reactions by Germany, Switzerland, and Italy in shuttering their nuclear power plants, you have the recipe for much higher uranium prices going forward.

Russia has stated categorically that once the so-called Highly Enriched Uranium Purchase Agreement (HEU) expires at the end of next year, it will not be renewed; and that will remove up to 25 million pounds from the marketplace each year thereafter.

Cameco and Rio Tinto’s recent bidding war over Hathor and the recent comments of Paladin’s CEO, who declared the sector’s shares to be oversold and expressed his fears that his company would be a takeover target, are testament to the fact that those within the industry are focusing squarely on the future rather than the here and now.

Love it or loathe it, nuclear power is here to stay (at least until a viable alternative can be found), and that alternative currently seems a long way away – something that is definitely not reflected in the price of either uranium or the share prices of the companies that produce it.

Source: Uranium One

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Recommendation: Uranium One (UUU.T)Uranium One, Inc. is a Canada-based uranium producer with assets located in Kazakhstan, Australia, and the USA. It also operates the Mkuju River project in Tanzania. Formed through the merger of Southern Cross Resources, Aflease Gold, and Uranium Resources Limited of South Africa in 2005, it subsequently acquired UrAsia Energy Ltd., Energy Metals Corporation, and significant stakes in the Willow Creek mine in Wyoming and the Akbastau, Karatau and Zarechnoye mines in Kazakhstan. All of these assets combine to make Uranium One the fourth-largest uranium producer in the world.

In December 2010, JSC Atomredmetzoloto (ARMZ), which is a wholly owned subsidiary of Rosatom, the Russian State Corporation for Nuclear Energy, took its stake in the company to 51% in a friendly bid.

In 2011, the company produced 10.66 million pounds of triuranium octaoxide (U3O8), or “yellowcake,” at its six Kazakhstan mines and sold 9.88 million pounds, with a low cash cost/lb of $14.43, making it one of the lowest-cost producers of uranium in the world and therefore among the most sensitive to a rising uranium price.

Source: Uranium One

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Although over 90% of the company’s uranium is mined in Kazakhstan, 2012 will be the first full year that Uranium One’s two newest projects, the Willow Creek mine in the Powder River Basin of Wyoming, USA, and the Honeymoon mine in South Australia, will be in full production; and both projects represent significant projected increases in the company’s production profile. Uranium One currently has a 51% stake in Honeymoon, with the remaining 49% being owned by Japan’s Mitsui & Co., but, in light of Japan’s recent nuclear issues, Mitsui has announced it will be withdrawing from the JV. Agreement has been reached as to how this will be done, and the company expects regulatory approval in Q3 2012.

Currently, Willow Creek is slated to produce an additional 1.3 million pounds per year, with capacity expanding to 2.5 million pounds, while Honeymoon will add a further 880,000 pounds (of which Uranium One’s interest will garner 51%). Both sites use in-situ recovery (see panel).

In early August 2012, Uranium One announced its results for Q2, and the numbers were compelling enough for us to assume that, if the company executes on its planned strategy (always the biggest issue when investing in mining companies), the stock should move materially higher.

In Q2 the company earned $0.03 per share, which was 50% ahead of the market consensus of $0.02 (though this included foreign exchange, hedging, and tax gains totaling some $38 million), on slightly lower-than-forecast earnings from mining operations of $40.1 million. Importantly, however, the cash cost/lb remained in line with expectations at $16.46/lb (which reflected the addition of higher-cost production from Willow Creek and Honeymoon, as both sites came online). Production exceeded forecasts in five of the company’s six established mines.

In-Situ Recovery

In-situ recovery or “leaching,” as it is less appealingly called, involves the pumping of lixivants, or leaching liquids into the porous ore body while it is still in the ground, and then recovering the ore by pumping it back to the surface and processing the solution. The leaching liquids can be acid- or alkali-based, depending on the geological properties of the ore body, as well as the jurisdiction in which leaching is being conducted. The advantages of this method are that it involves minimal surface disruption and generates no tailings or waste rock.

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Source: Uranium One

Source: Uranium One

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In the last two months alone, there have been several positive developments that point to higher future uranium prices.

Firstly, Japan quietly recommissioned the first of its nuclear reactors since the post-Fukushima moratorium was put in place, when Kansai Electric Power’s No. 3 Reactor at its Oi plant in western Japan had its control rods removed in early July. Secondly, China’s National Nuclear Power Company announced in late August that it had received final approval from the Ministry of Environmental Protection to move forward with its planned initial public offering, which will finance the construction of five power projects valued at US$27.3 billion (though the timetable for the IPO is unclear at this stage).

But perhaps the biggest potential fillip for the uranium price is the announcement by Australia’s BHP Billiton that, due to concerns over rising capital expenditure costs, it is mothballing the planned expansion of its Olympic Dam project in South Australia.

The Olympic Dam mine is a true behemoth. Discovered near a sheep station in South Australia in 1975, it began production in 1988 and, as well as yielding 117,000 ounces of gold last year, it holds the world’s fourth-largest copper deposit (194,000 tonnes, in 2011) and, more importantly for the purposes of this discussion, the largest uranium deposit on the planet, from which 4,000 tonnes were produced in 2011.

As large as these numbers are, however, it was the scale of the proposed expansion that is truly mind-boggling. Had it gone ahead, the company was expected to have drilled 24 hours a day for seven years just to reach the ore body itself. It’s easy to see why, from a cost perspective, the decision was made to postpone expansion.

Had the project not been mothballed, production of copper was due to be ramped up to 730,000 tonnes per year (a 376% increase), while uranium was scheduled to reach 19,000 tonnes per year (a 475% increase). As of August 21, 2012, that supply will not be coming to the market anytime soon, as the project has been suspended indefinitely by BHP.

As we referenced earlier, current demand for uranium is roughly 68,000 tonnes per annum against a steady supply of some 40-50,000 tonnes. Much of that shortfall was due to be made up by the expansion of the Olympic Dam project over the coming decade; but that is now highly unlikely to be the case, which will provide a solid backstop to the uranium price going forward.

But what do these positive developments mean for Uranium One?

With one of the highest exposures in the sector to moves in the uranium price, Uranium One has seen its share price come under significant pressure over the past year; but now, with the uranium price finding a base around $50/lb – a level which, incidentally, makes many of the more expensive producers virtually unprofitable – and with the strongest quarter ahead of us, seasonally, the combination of positive factors influencing the uranium price looks set to push it higher as we head into 2013; and Uranium One will be a major beneficiary of such a move.

Paladin’s recent long-term off-take contract that will provide almost 14 million pounds of uranium to an undisclosed “major utility,” as well as the $3 billion supply line that the UAE recently locked up with six firms (including Uranium One), demonstrate that end users of uranium are starting to try and lock in lengthy contracts, and that is always a good sign of fundamental price support.

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In 2007, with uranium peaking at $90/lb, Uranium One’s share price reached an all-time high of C$16.94; but during the bloodbath of 2008, when commodity stocks took a beating far in excess of that taken by their underlying products, the stock tumbled a staggering 94% to trade at C$1, as liquidity became the one and only concern of speculative investors around the globe. As the world stabilized and confidence returned, however, Uranium One was a stellar performer, rising over 500% and peaking at C$6.55, before the woes of Fukushima decimated the sector once again. Interestingly enough, between early 2010 and March 2011, once the initial deflationary fears of 2008 had subsided, uranium soared to $70/lb once again. But then came Fukushima.

Should uranium scale anything approaching those heights again as a more pragmatic approach to nuclear energy prevails (as it needs to do), supply continues to tighten, and the world’s central banks pursue their experiments in monetary science, it is likely that one of the major beneficiaries will be Uranium One.

With 90% of its assets located in a country that shares land borders with two of the world’s largest projected users of uranium, and with extremely low production costs, high sensitivity to price appreciation of the underlying commodity, and a market capitalization that will soon put it on the radar of many value investors, Uranium One is extremely well placed to attract not just speculative inflows, but serious institutional investment.

Currently, Uranium One trades below its NAV (0.75x) while its price-to-book ratio has retrenched to 1.19x from a loftier 3x at the end of 2010 (pre-Fukushima). The company’s revenue and production is climbing steadily, and 2012 will see the fourth consecutive year of increased attributable sales.

Source: Uranium One

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Investors who feel comfortable that physical uranium has found a price floor at current levels, and who understand the risks associated with this most volatile of commodities and are looking for exposure to a future in which it is very hard not to see nuclear fuel playing a significant part, should take a long, hard look at Uranium One.

Buy Uranium One (UUU.T) at C$2.40 with an initial target of C$3.00 and a longer-term target of $4.00. Investors may want to establish a 50% position here and sell 90% puts in an attempt to average into the position on any weakness post-Jackson Hole.

Full Disclosure: The Vulpes Testudo Fund currently holds a position in Uranium One.

. . . . .

UNDER THE RADARDoubts about DraghiSource: Spiegel Online

In a surprise move, European Central Bank President Mario Draghi has opened himself up to making an unusual appearance -- defending his controversial monetary policies to the German parliament, the Bundestag.

“If the Bundestag were to invite me, I would gladly come,” Draghi told German daily Süddeutsche Zeitung on Friday. “It would be a good opportunity to clarify what we are doing.”

According to opinion polls, nearly half of Germans mistrust the ECB leader, a reality that hinders his work, Draghi told the paper. “I must do more to explain our measures,” he added.

Draghi has encountered resistance from the Bundesbank, Germany’s central bank, but also from leading politicians in the country, some of whom have criticized his recent decision to purchase sovereign bonds in unlimited quantities from crisis-plagued euro-zone countries to reduce yields. Critics argue that the purchases amount to state financing, which the ECB is prohibited from doing.

In the interview with the Süddeutsche Zeitung, Draghi reiterated his position that the bonds would only be purchased in exchange for strict conditions. “Not acting would be much riskier,” he warned. Otherwise, he said, the struggling euro-zone countries would be caught in a vicious cycle of mounting borrowing costs from which even good economic policies could no longer save them.

“The financial markets must understand that the euro is irreversible,” Draghi said, adding that his bond-buying program has already shown positive results, with trust in the common currency growing around the world. “Fund managers are bringing their money back to Europe,” he said.

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Indeed, Spanish 10-year bond yields dropped to 5.62 percent on Thursday, down from their July 24 level of 7.64 percent -- well over the 7 percent limit that economists say is unsustainable in the long term. Meanwhile, Italian bond yields were down to 5.03 percent from 6.6 percent on July 24. Read more…

Tall Order in Ordos: Giving a Ghost City LifeSource: Caixin Online

A desert city infamously littered with new but vacant apartment buildings and idle construction sites is getting no relief in the parched climate for local government budgets.

Ordos, where local leaders have been trying for years to build a thriving community almost from scratch, remains a people-ready but empty ghost town.

Officials haven’t given up hope that vast coal reserves under the loess and sand of the surrounding Ordos Desert, in south-central Inner Mongolia Autonomous Region, will be their ticket to urban prosperity. Ordos is home to one-sixth of China’s coal reserves.

The government in 2003 started awarding coal rights to mining-and-real estate development companies that agreed to build housing, office buildings and roads. The plan was to prepare a thinly populated section of Ordos called Kangbashi for up to 1 million people.

And during the build-up between 2003 and last year – a period marked by high coal prices – Ordos recorded blistering growth. The city’s GDP rose 15 percent year-on-year to 322 billion yuan in 2011.

But companies, jobs and people never arrived to fill Kangbashi’s industrial parks and apartment complexes. In addition, central government real estate controls in 2010 curtailed the speculative investment that encouraged development. And mining enterprises at the foundation of the local economy have watched revenues dwindle in the face of overseas competition and a slowing domestic economy.

Today, the local economy is suffering and the city government is struggling to arrange banks loans, issue bonds and attract private investors to continue growth.

The government has fueled the boom through borrowing schemes and by attracting investment, betting that any public money spent on building projects would yield handsome returns in the future in the form of tax receipts.

Local officials haven’t abandoned hopes for Ordos, population 600,000. Nor have they stopped betting that investment will eventually pay off as government revenues rise.

Indeed, Mayor Lian Su said in April that the city government plans to “do everything possible to expand credit (and) guarantee new loan issues top 50 billion yuan in 2012.” Read more…

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The leader vanishesSource: The Economist

In 1971 Roderick MacFarquhar, doyen of Western scholars of modern China, wrote an essay suggesting that understanding the country’s politics required an examination of photographs of its leaders, to see who was pictured and where leaders were positioned relative to each other and to Chairman Mao. Mr MacFarquhar was onto something, but this analytical technique is of little help when a leader disappears from the frame altogether as the vice-president, Xi Jinping, did from September 1st—until a brief official mention just before The Economist went to press.

Mr Xi, who is 59, is on the verge of succeeding Hu Jintao as the general secretary of the Communist Party. Yet meetings with foreign dignitaries on September 5th were abruptly cancelled. On September 8th he did not attend a meeting of the Central Military Commission, of which he is a vice-chairman. On September 10th Study Times, an official newspaper, reported on a speech by Mr Xi, but the speech had been delivered nine days earlier. Pressed on the question of Mr Xi’s health on September 11th, China’s Foreign Ministry offered no information. On September 12th an official report mentioned Mr Xi offering condolences on the death of a retired official.

With no hard facts, rumours flourish, even more so today with the rise of social media and a huge global China-watching profession. In the case of Mr Xi’s disappearance, explanations have ranged widely and wildly from a back injury to a heart attack to, most implausibly, an assassination attempt by means of a traffic accident, though the source of this last tale, Boxun, a Chinese-language website hosted in America, quickly deleted it.

All of this reminds China-watchers how little has changed in the four decades since Mr MacFarquhar admitted the tools of his trade were blunt and unreliable. They might recall one of their early manuals, “The Art of China-Watching”, an in-house article produced by the CIA in 1975, containing the best wisdom that American spymasters could offer. The author summed up years of exasperation in one subheading: “Does Logic Help?” Read more…

Eurozone crisis: Greece may gain more time to pay debtsSource: The Guardian

Eurozone finance ministers hinted on Friday that Greece may be given more time to pay its debts, though they ruled out a third bailout, which most economists believe will be needed before Athens can get back on its feet.

At a meeting of the 17-nation currency bloc in Nicosia, Cyprus, there were signs of increasing flexibility and optimism, but Spain appeared to be moving closer to making a formal request for financial assistance.

The Greek finance minister said the atmosphere had eased after previously strained talks between Athens and its creditors and a deal could be signed before the end of October.

“It seems to us quite clear that Greece has already produced a huge effort but will have to continue to do so,” said IMF boss Christine Lagarde. “And the target when it comes to achieving debt sustainability is very high, so there are various ways to adjust: time is one, and that needs to be considered as an option.”

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Stock markets rallied across the world, continuing a strong run since the ECB said it was prepared to lend unlimited amounts to distressed sovereign nations, though with strict conditions. The FTSE jumped 95 points to 5915 while the French CAC leaped 2.3% to 3581.

The new Greek coalition government is seeking a two-year extension to 2016 for meeting a budget reduction programme. The threat of a general strike and violent protests over a further round of cuts that will result in 50,000 public sector job losses have strengthened the hand of Greek negotiators, along with predictions that a five-year recession will result in a total 20% fall in GDP in 2013.

But the smiles among finance ministers as the meeting closed disguise huge disquiet at protests in Spain and Portugal this week. Spain, deflecting pressure to spell out whether it needs more European financial support, told eurozone finance ministers it will set clear deadlines for structural economic reforms by the end of the month. “We will adopt a new set of reforms to boost growth … It will be in line with the recommendations of the European commission,” economy minister Luis de Guindos said.

However, Madrid is in deep financial trouble and faces calls from several of its regions for the country to break up rather than continue deep austerity cuts. More than 1 million people marched in Barcelona this week in favour of Catalan independence. Read more…

In the streets Iran’s currency trades at 52% discount to the official exchange rateSource: Sober Look

Internal conditions in Iran continue to deteriorate. The street value of Iran’s currency (the rial) has hit new lows as the currency decline spirals out of control.

NBC News: - Street traders in Iran say the country’s currency has struck a new record low against the U.S. dollar, the second consecutive day it has fallen sharply.

They say the rial on Monday dropped some 5 percent, with 25,650 rials now needed to purchase one dollar. A day earlier it fell nearly 7 percent.

The currency’s slide is a sign Western sanctions over Iran’s nuclear program are biting, although Iran says it has enough reserves and blames nervous markets. The West suspects Iran aims to build nuclear weapons. Iran denies that.

That’s a whopping 52% discount to the official exchange rate.

And foreign currencies are even more difficult to access these days because international banks are reluctant to help Iran set up foreign accounts, transfer funds, or otherwise transact globally. This is driven by the situation with Standard Chartered and HSBC (who got themselves into a bit of trouble). Some banks in China have supposedly been helping Iran (see this NYT article), but that’s probably been shut down as well.

With no official payment systems in place and no access to foreign currency accounts, Iran is buying up gold from Turkey to use as a form of currency. Since gold does not pass through central banks’ controlled payment systems, it is harder to track Iran’s transactions that may violate Western sanctions.

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WSJ: - Gold exports [from Turkey to Iran] in the first seven months of the year are already five times more than the total in 2011 owing to rising demand from Iran, which accounted for only 4% of sales two years ago, when its purchases started.

Without access to foreign currency (and unable to afford dollars in the street), the Iranian people are no longer able to travel abroad and are effectively trapped in their own country (the official exchange rate is only permitted for pilgrimage trips). Read more…

Wrap-Up

Grant Williams Chief Investment Strategist

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