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Gold Mining Stocks Investing Lesson From History

Commodities / Gold & Silver Stocks Aug 21, 2008 - 01:02 PM GMT

By: Money_and_Markets

Sean Brodrick writes: I was in Colorado recently, and all around me were reminders that I was in a state with a rich history of minerals — natural gas, silver, and especially gold.

The Colorado Gold Rush, better known as the "Pikes Peak Gold Rush," is America's most profitable afterthought. Miners who had rushed across the continent in the 1849 California Gold Rush backtracked a decade later to Colorado, to chase down elusive rumors of gold.

And boy, did it pay off. Just one part of Colorado, the Cripple Creek and Victor Mining District, produced over 500 mines and 21 million ounces in gold — more than the production of the California and Alaska Gold Rushes combined.

The Pikes Peak Gold Rush is a tale of greed and discovery, luck good and bad, a tale populated by a collection of misfits, Southern slaveholders, Northern abolitionists, suffragettes and wild men as any American odyssey. And it has six lessons that still apply today ... lessons I'll tell you about in just a bit.

First, let's set something straight. There was no gold at Pikes Peak — the 14,110-foot-high mountain named after a U.S. Army captain who declared it "impossible" to climb (a few years later, groups of adventurers, including a woman, proved him wrong).

Visible from 130 miles away, Pikes Peak served as a beacon for fortune-seeking gold prospectors.

But since Pikes Peak is visible from 130 miles away, in the heyday of the gold rush, fortune-seekers used the mountain as a beacon to find their way to the gold fields.

Gold in Them Thar' Hills

Rumors of gold in Colorado had circulated for centuries. Indeed, there was a site on the Blue River called the "Ute Bullet Pouch," where the mountain tribes were said to dig gold for use in molding their rifle bullets. And those rumors and others were carried back by Cherokee adventurers who helped organize some of the first expeditions into Colorado's forbidding high plains and peaks.

However, gold in Colorado was not easy to find. But good things sometime happen in threes.

In 1858, George A. Jackson discovered placer gold at the present site of Idaho Springs - the first substantial gold discovery in Colorado. Jackson tried to keep a lid on his secret, but when he paid for some supplies with gold dust, the secret was out.

Around the same time, a party of prospectors led by William Green Russell, a man from Georgia who had worked in the California gold fields, explored Cherry Creek in what is now downtown Denver. And they found enough gold (20 troy ounces) to spark gold fever back East.

And in 1859 John Gregory, a wiry, red-haired cracker — also from Georgia, and also with experience in California - made a much richer strike at Clear Creek, and nearby Central City quickly became a boomtown. By that spring, over 100,000 people were headed into the hills, with "Pikes Peak or Bust" painted on many of their wagons.

In 1859, more than 100,000 people headed for the hills with Pikes Peak or Bust painted on their wagons.

The Pikes Peak Gold Rush drew stout farmers and hardy adventurers ... and thieves and chiselers. There were enough misfits among them to move the editor of the Nebraska City News to label the whole emigration as "a shiftless, lazy, lousy, scurvy, profane, insane and idiotic herd of rapscallions, nincompoops and ninnies."

Overnight Boomtowns

Gregory's find became known as Gregory Gulch. He staked out the first mineable lode discovered in Colorado. A few months later, 5,000 people were working the area. The town that sprung up around that mine was Central City, "the richest square mile on Earth."

Other boomtowns sprang up — some have faded into history, like Buckskin Joe, Capitol City, and Black Hawk. Others found new life after the gold rush, like Aspen and Breckenridge. South Park, of TV cartoon fame, was the site of a discovery of huge placer deposits of gold.

Most of these towns burned down at one time or another — fire was the constant bane of mining camps. But while they existed, they were some of the biggest depositories of wealth in the world.

Gregory sold his claim for a modest sum and spent it, then disappeared. His story was all too common.

Miners, Saints, Sinners and Winners

Another gold rush legend was Joseph "Buckskin Joe" Higganbottom. A colorful frontiersman who dressed in deerskin, Buckskin Joe gave his name to one of Colorado's earliest and wildest mining camps, a town that, in its day, rivaled Denver in size and elegance. Miners pulled $1.6 million in gold out of the ground around the town of Buckskin Joe in just a few years.

The boom came too late for the original frontiersman who, disgusted by his bad luck, traded his interest in the camp for a horse, a gun and settlement of his bar tab, and then disappeared into the wild, never to be seen again.

But there were also people like Spencer Penrose, a handsome, Ivy-league educated adventurer who wired his older brother in Philadelphia for money to invest in the C.O.D. Mine. His brother wired back $150 with instructions for Spencer to use the money to come home. Instead, Penrose invested the money in the C.O.D. Later he sent his brother a $10,000 check as a return on the $150 investment. He could afford it — Penrose made a huge fortune in the gold fields, and in copper as well.

And a hard-working Colorado Springs carpenter named Winfield Scott Stratton was another success story. Stratton dug for 15 years and finally found gold on the Fourth of July in 1901. He called that claim the Independence, and he eventually sold it for $11 million.

Colorado mines made successes of hundreds of gold seekers and entrepreneurs turned millionaires. And some of the biggest successes were among those who didn't come to mine gold ... they came to mine the miners themselves for wealth.

For example, Henri and Katrina Murat were French-speaking immigrants of dubious lineage, though Henri styled himself a "Count" and Katrina a "Countess straight from Paris." The Murats settled in to the bustling camp life of the first South Platte settlement, a town called Montana.

Henri set up a barber shop, clipping hair and shaving beards to the tune of one dollar per customer (an outrageous sum at the time).

The Countess Katrina, meanwhile, started a laundry business washing the miners' heavy pants and flannel shirts for the equally outrageous price of fifty cents a garment.

Horace Tabor made a fortune in mining en route to the U.S. Senate.

And then there's Horace Tabor. Horace and his wife Augusta cut a road through the mountains for their wagons, using a pine tree fastened to the back of the wagons as a brake to keep from pitching down the steep slope to their doom. They arrived in Idaho Springs so soon after the gold rush started that Augusta was the first white woman in camp. However, when Horace moved Augusta to Denver for the winter, their claim was jumped. So, they moved to Leadville to run a general store.

But they weren't done. Nineteen years later, two miners who had been staked by Tabor found an immense lode. Tabor sold his interest for $1 million.

Then, a man named Chicken Bill Lovell offered to sell Tabor another mine for just over $100,000. What Tabor didn't know is that Chicken Bill had salted the mine with silver from Tabor's original mine. Tabor bought the new mine and set his men to work. He found out he had been bilked, but had the last laugh — too stubborn to quit, he told his men to keep digging, and sure enough, they struck silver.

Later, Tabor become U.S. Senator for Colorado — just another milestone on a wild boom-and-bust career.

Cripple Creek Bonanza

To me, the really interesting thing about the Colorado Gold/Silver Rush was how long it lasted. Remember, the original rush was in 1859. Over 30 years later, in 1890, cowboy and prospector Bob Womack discovered the rich gold ore that touched off the legendary Cripple Creek Gold Rush.

The Colorado Gold/Silver Rush lasted more than 30 years.

Womack was one of mining's sad tales. He sold his claim for $300. Eventually, over $5 million in gold was taken from the mine.

Located a few miles southwest of Pike's Peak, the towns of Cripple Creek and Victor boomed for well over a decade. 1900 was a pivotal year for the Cripple Creek Mining District. Gold worth more than $18 million was mined that year in nearly 500 mines. Eight thousand miners worked there, and the district produced 30 millionaires.

Just after the turn of the century, the District's gold production began declining. Eventually, this precious metals boom turned to a bust, like so many before it. But there are still great tips you can take away from the Pikes Peak bonanza ...

Tip #1: Don't expect every prospect to turn into a winner.

Do your due-diligence. No whims, tips, fantasies, or wheeling and dealing. Just good, solid research, and discipline. Otherwise, the consequences can be unpleasant to say the least.

Also beware of stories that are too good to be true. Entrepreneurs may not "salt" their mines with riches today, but it's best to look at every potential trade with a cool head before investing your cold cash.

That's why you shouldn't put all your eggs in one basket. Instead, have a diverse portfolio of the best mining stocks you can find.

Tip #2: Don't be discouraged if your investment doesn't pay off right away. Keep in mind the story of "Buckskin Joe" Higganbottom. If he'd just stuck with the digging despite disappointing early returns, he could have had a big share of a $1.6 million bonanza. And Winfield Scott Stratton is another exampled — it took him 15 years of digging to strike paydirt — but he walked off with $11 million.

Tip #3: Don't underestimate the potential value of a great discovery. Far too many miners in Colorado sold out their stakes for a pittance before they knew the real size and scope of their find. Similarly, there are a lot of undervalued discoveries out there today. If anything, the recent market correction has only made more of them.

Tip #4: You don't have to be a miner to make a fortune in metals. Take it from Horace Tabor. You don't have to dig the rock yourself to make a killing. Indeed, Tabor's biggest wealth came from putting his money to work. Today, you can build your wealth quite nicely by buying the right stocks.

Tip #5: Don't sell too soon. Time and again, many investors sold too early and missed out on the biggest gains. I think that's a conundrum facing many investors today as they see the price of gold and silver go down. You just have to look at a chart to see the long-term uptrends aren't broken, and a quick glance at fundamentals will show you that supply can't keep up with demand. In other words, the bedrock of today's gold and silver boom is still in place, and smart investors know this is a great time to buy.

Tip #6: However, there will be a time to sell. How do you know when? You don't. But when you see all your friends rushing in to buy what you bought a long time ago, that's a pretty good warning sign. And when you're broker is pounding on your doorstep to get you to buy what you already own, that's another sign.

Yours for trading profits,

Sean

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