Phelps Dodge just decided to buy two Canadian nickel companies — Inco and Falconbridge — for $40 billion. The resulting metal giant will be a dominant player in the world nickel and copper markets.
Apparently, their execs agree with my report, “Seven Metals About to Soar.†I can think of only one reason that Phelps Dodge would make this deal. Like me, the company’s executives believe the prices of nickel and copper are going much higher.
Sure enough, metals prices have started to surge this week, especially copper. It wasn’t just the merger news, though. U.S. new home sales defied predictions, rising 4.6% in May. Remember, new homes use a lot of copper.
Add that to other bullish news for metals around the world:
Enormous growth in fixed-asset investment in China, like metal-intensive power
grids …
Rising global stainless steel output …
The ongoing labor dispute at the world’s largest copper mine, Escondida, and …
Falling stockpiles of nickel, copper, aluminum and more!
The outlook for base metals is bright. And the outlook for precious metals is even brighter.
Silver Set to Soar
As I’ve been telling you, there are many reasons why silver should head higher.
The most basic reason is simple supply and demand — according to CIBC World Markets, there will be a deficit of 77 million ounces of silver this year alone. I think that estimate is conservative.
Plus, investment demand is growing by leaps and bounds. The iShares Silver Trust (SLV) now has 2,440 metric tonnes of silver on its books — that’s another 78 million ounces, way up from the 1.5 million ounces the fund had at its inception on April 28.
Silver’s chart is also showing some nice support. Here’s what I’m seeing …
First, there’s support from price action earlier this year, when silver plateaued before its big move.
Second, a recent uptrend offers support below current prices.
Third, the indicator at the bottom of my chart measures momentum. It shows silver is oversold and due for a bounce. If you bought silver when this momentum indicator was at the same level in August, you got a pretty good run.
That’s where we are today. Now let me tell you about another old, but very relevant silver boom — the discovery of the Comstock Lode. I think the story holds important lessons for silver investors today.
The Largest Silver
Find in U.S. History
The Comstock Lode yielded $400 million in silver (and some gold) between 1859 and 1878. Back then, silver was selling for $1.30 an ounce, so the haul would be worth $5.5 billion at today’s prices.
The Comstock Lode was discovered near what became Virginia City, Nevada. It was one of those out-of-the-way places passed over by the first wave of settlers on their way to the great gold rush of ‘49 in California. Eventually, a permanent mining camp was established in the valley. Some small strikes were made, and gold fever was definitely in the air.
In the spring of 1859, two miners, Peter O’Riley and Patrick McLaughlin, searching for unclaimed land, began prospecting with a rocker (a sifting tool) on a mountain slope near a small stream. They found a little gold … but also large clumps of heavy blue-black mud that clogged the rocker and made it nigh impossible to wash out the fine gold.
Closer inspection revealed that the blue-black mud was almost pure silver. It could be dug out by the ton with a shovel, and each ton was worth $2,000!
Every story needs a villain. Enter Henry Thomas Paige Comstock, who had an advanced degree in weaseling. He came across O’Riley and McLaughlin, saw their discovery, and declared that he had a claim on the ground. That was a lie, but the panicked men didn’t want trouble. So they gave Comstock and his partner shares in the claim, which became the famous Ophir Mine.
News traveled fast: The silver rush was on! Prospectors, drifters, and ne’er-do-wells poured into the valley to work in the underground mine tunnels.
One of the feckless adventurers was none other than Samuel Clemens — Mark Twain. By the time Twain got to town, the mines of the Comstock Lode were a beehive of activity, and Virginia City was home to scum and riff-raff of every description. Twain wrote:
“The country is fabulously rich in gold, silver, copper, lead, coal, iron, quicksilver, marble, granite, chalk, plaster of Paris (gypsum), thieves, murderers, desperadoes, ladies, children, lawyers, Christians, Indians, Chinamen, Spaniards, gamblers, sharpens; coyotes (pronounced ki-yo-ties), poets, preachers, and jackass rabbits. I overheard a gentleman say, the other day, that it was ‘the d—-dest country under the sun,’ and that comprehensive conception I fully subscribe to.â€
“It never rains here, and the dew never falls. No flowers grow here, and no green thing gladdens the eye. The birds that fly over the land carry their provisions with them. Only the crow and the raven tarry with us. Our city lies in the midst of a desert of the purest, most unadulterated and uncompromising sand, in which infernal soil nothing but that fag-end of vegetable creation, ‘sage-brush,’ ventures to grow.â€
We like to think of Las Vegas as the original, 24-hour Sin City. But Virginia City served that purpose much earlier. In 1863, the number of arrests equaled one-third the town’s population of 30,000 people!
The wealth of the mines fueled Virginia City’s growth, and made millions for Wall Street. Hordes of stock speculators made fortunes from the Comstock silver boom.
All Good Things Must End, But
Valuable Lessons Are The Legacy
The Comstock Lode hit peak production in 1877, producing more than $14 million of gold and $21 million of silver that year. But three years later, the mine was mostly played out.
As for the people who started the silver boom …
- After weaseling his way into the deal, Henry Comstock sold his share of the Ophir mine for $20,000 and opened a series of businesses. Every one failed. He became a prospector again, but without success. In September 1870, he committed suicide.
- Peter O’Riley, one of the discoverers of the Comstock Lode, held on to his interest, collecting dividends and finally selling out for $50,000. He became a dealer in mining stocks and spent his fortune tunneling into the Sierras, certain he would find a richer claim than the Comstock. That didn’t pan out. He lost everything, went insane, and died in an asylum.
- Patrick McLaughlin, co-discoverer of the Comstock, sold his share of the Ophir Mine for $3,000, lost his money quickly, and worked at odd jobs until his death. He was buried in a pauper’s grave.
What are the lessons you should take away from the Comstock tale?
Lesson #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. When a guy tells me he has a prospect north of the Arctic Circle, that he’s finding diamonds as big as his fist, that he’s got gold nuggets the size of his head, and all he needs is $10 million to develop it properly, I smile, nod, and cross him off my list. Those are the easy ones to discard.
Other times, it’s not so easy to spot the losers. Management may be sharp in theory but have no track record in practice. The numbers may be huge, but when you drill down, you may find that they don’t add up. 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.
Lesson #2: Don’t underestimate the potential value of a great discovery.
If McLaughlin and O’Riley had stood their ground and hung on to their blue-black mud, they could have given Thomas Comstock the bum’s rush.
Similarly, there are a lot undervalued discoveries out there today. If anything, the recent market correction has only made more of them.
Lesson #3: You don’t have to be a miner to make a fortune in silver.
While a minority of prospectors became fabulously wealthy, many more stock investors made fortunes without ever seeing the inside of a silver mine. The same holds true today: You don’t need to don a hard hat to benefit from high metals prices. You can build your wealth quite nicely by buying the right stocks.
Lesson #4: Don’t sell too soon.
Time and again, many investors sold too early and missed out on the biggest gains.
For example, in 1870, shares of Crown Point, one of the most productive Comstock mines, went from $2 to $5 each. That was a big move and many sold. Two years later, one share of the stock was trading for $1,872! Talk about leaving money on the table!
Don’t expect that type of return in today’s world. But given my bullish outlook for silver, I don’t think now’s the time to be selling.
Lesson #5: 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 Brodrick
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About MONEY AND MARKETS
MONEY AND MARKETS (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Sean Brodrick, Larry Edelson, Michael Larson, Nilus Mattive, and Tony Sagami. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Regular contributors and staff include John Burke, Colleen Collins, Amber Dakar, Ekaterina Evseeva, Monica Lewman-Garcia, Wendy Montes de Oca, Jennifer Moran, Red Morgan, and Julie Trudeau.
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