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Invest in Gold and Silver like a Pirate

Commodities / Gold & Silver May 02, 2007 - 09:37 AM GMT

By: Money_and_Markets


Sean Brodrick writes: My wife and kids are so excited about the new Pirates of the Caribbean movie coming out at the end of this month. My kids like pirates, while I think my wife just likes Johnny Depp!

Of course, I'm most interested in the economics of the real pirates of the Caribbean. I'm talking about more than "pirate gold" — namely, the four S's — silver, smuggling, sugar and slaves.

I think natural resource investors can learn a lot from the pirates. I'll give you the specific lessons in a moment. First, I want to explain how all of these factors contributed to the rise of an entire pirate economy …

Silver and Smuggling: Taking a Shine to Pieces of Eight

I've told you all about Spain's rush for New World silver in " On My Way to Check Out a Mine in Hispaniola " and " Grabbing Mexican Gold and Silver ." But just to refresh your memory:

  • The yield from Mexico's mines doubled the world supply of silver in less than two centuries.
  • By the 1700s, Mexico's silver mines were producing nine million troy ounces of silver each year.
  • If you include production from Bolivia and Peru, from 1530 to 1800, approximately $6 billion to $8 billion worth of gold and silver were mined in the Spanish American colonies.

You can see why Spain quickly became the wealthiest state in Christendom. However, the country was so beggared by its corrupt, war-mongering rulers that it couldn't afford to defend its vast holdings in the New World.

That had "opportunity" written all over it for French, English, and Dutch pirates. They swarmed the Spanish treasure ships like fleas on a bunch of slow, ungainly dogs.

What really enraged the Spanish was that the pirates did this with varying levels of complicity from their governments. Heck, Henry Morgan was such a successful privateer and pirate that the English Crown knighted him and appointed him governor of Jamaica!

Why were the other European powers so friendly to pirates? Because they were left empty-handed after the Pope gave the Caribbean and most of South America to the Spanish in the Treaty of Tordesillas (1493).

See, in the 16th Century, the Spanish "owned" South America and the Caribbean. To keep out the riff-raff (English, French and Dutch), they passed laws allowing only Spanish merchants to trade with Spanish colonies in the Americas.

Big mistake! The Spanish merchants fleeced the colonists. So, the colonists found it much better to do business on the French island of Tortuga, England's base on Barbados, and the Dutch island of Curacao.

Meanwhile, the Spanish did have one busy port — Trinidad. But the governor there had a laughably small garrison and no fortifications. Not being a fool, he took bribes and looked the other way as French, English and Dutch smugglers did a rip-roaring business. So Trinidad also became a base for smugglers and pirates.

Every now and then peace would break out and ruin business for pirates, privateers and smugglers. But it never lasted long. And the smugglers really hit paydirt in the mid-1600s when the British Crown decreed that English colonial goods be carried only in English ships and limited trade between the English colonies and foreigners.

These laws were aimed at ruining those uppity Dutch merchants who depended on free trade. But they amounted to a windfall for smugglers.

There's little doubt that silver and smuggling helped establish the economies of the Caribbean colonies. But Spanish silver eventually became a back-story to a much bigger commodity …

A Bittersweet Tale of Sugar and Slavery

Sugar was so important that Columbus brought sugar cane with him on his voyage to the New World. And when the gold ran out, colonists focused on producing lots of it. By 1540, there were several large sugar plantations in Hispaniola.

Unfortunately, sugar and slavery went hand in hand. Starting in 1512, slaves were brought over to work the land. Why bring slaves all the way from Africa? Because in their rush for precious metals, the Spanish worked the natives to death (diseases played a big part, too).

As Europe's appetite for sugar grew and grew, sugar became the white gold of the Caribbean. Along with rum (made from sugar), tobacco, chocolate, and lumber, sugar was the foundation of the "golden triangle" of trade.

These were the goods that pirates were more than likely to pillage. After all, the silver fleet only sailed once a year. But an industrious pirate could make money on slaves, sugar, tobacco and manufactured goods all year long!

All the while, the European powers battled over prime sugar-growing islands. For example, the Dutch sugar island of Saint Eustatius changed ownership 10 times between 1664 and 1674 as the English and Dutch slugged it out! And guess who the European powers hired to do their dirty work in these constant battles? You get one guess, and I'll spot you the letter "P."

It's fair to say that the late 1600s and early 1700s constituted a "Golden Age of Piracy." Spanish silver production surged. Slaves were shipped by the ton. The European hunger for sugar approached a mania. And constant warfare between the European powers provided plenty of opportunities to pick up government work both preying on enemy ships and guarding colonies.

The salad days of pirates only came to an end when Britain won decisive victories at sea. That freed up the country's navy to clear the scum from waves. After 1720, pirates were rounded up, sworn to live by the law or hanged. And this is the period we see portrayed in the Pirates of the Caribbean — when the world is changing and pirates like Jack Sparrow and Barbossa are trying to stay one step ahead of the hangman's noose.

With the age of steam, the golden age of piracy sailed into the sunset. However, the period has left behind quite a legacy that continues to capture our imaginations today. And, for investors, there are some great lessons to be learned …

Five Pirate Tips for Sailing Through Today's Tricky Financial Waters

First, precious metals never go out of style. Gold and silver are great investments today, just as they were in Henry Morgan's day. That's because they continue to have real value.

And I believe uranium is our new "white gold" — a commodity that, like sugar, will ride a groundswell of demand that increases not only over months … but years.

Look, mine supplies of uranium fell short of demand by 70 million pounds last year alone. And the supply/demand squeeze is going to get much tighter. In fact, some analysts say mine supply won't meet global demand until at least 2017. That's a 10-year bull market, which makes uranium look like a darned good investment!

Second, it's best to become an early investor. The first pirate to attack a Spanish treasure fleet was Jean Fleury, a privateer sanctioned by the King of France. In 1521, he bagged two lumbering treasure ships off the Azores. In those early days, nobody was expecting piracy in the middle of the Atlantic, so the treasure ships only had a few cannons and no chance against a heavily armed and determined pirate.

Here's just part of what Jean bagged: 680 pounds of pearls, 500 pounds of gold dust, 150,000 ducats, three cases of gold bars, and five cases of silver bars!

Jean became a hero in France, and he was quite wealthy. But his major investor, the Viscount of Dieppe, took an even bigger share of the loot because of his foresight … and he never even had to get his feet wet.

Third, think big by looking at the long-term picture. By the time Henry Morgan came along, pirating was already a booming business. So he didn't have the first-in advantage of Jean Fleury. But by 1661, young Morgan was a captain in his own right and proving himself as a master of battle tactics.

He rode the waves of on-again, off-again wars between England and Spain to military success and wealth. Other pirates captured ships; Morgan captured whole cities — Gran Canada, Portobello, Maracaibo, even Panama City, which was the biggest, richest city in the New World at the time.

Here's the point for investors: Even if you find out about an investing trend after a lot of the easy money is made, you can still make big money with good timing and a long-term view!

Fourth, good management is critical to an endeavor's success. England's Queen Elizabeth I, or Queen Bess, had kind of a "thing" for pirates. Although it didn't start with Sir Francis Drake, he was one of her favorites. He also happened to be brilliant, thoughtful and cool under fire … the perfect combination to make him a terror on both sea and land.

Drake also didn't give up in the face of adversity. When his scheme to attack the city of Nombre de Dios on the Isthmus of Panama blew up in his face, he had his crew lay low for four months. Then, when their wounds were healed, they ambushed a gold-laden mule train. Nobody expected a pirate to attack a mule train!

Drake bagged 200 mules carrying hundreds of pounds of silver and gold. This daring made him a millionaire.

Investors would be wise to emulate Drake's resolve and resourcefulness. And they should also look for these same traits when they investigate the management of a company they're about to invest in.

Fifth, good PR is worth its weight in swag. When pirates flew the skull-and-crossbones flag, they were advertising. And the message was simple — "Give us your cargo or we'll kill you."

Pirates relied on their fearsome reputations. One pirate captain, Edmund Condent, put three skulls on his pennant. Edward "Blackbeard" Teach wound cannon fuses into his beard and set them on fire during attacks to make himself look like the devil. And Edward Collier was known for ferociously torturing anyone who didn't give up easily.

Though it's slightly different these days, good advertising can still do wonders for business. Well-executed PR helps companies bring in revenue more quickly and at greater volumes. It also helps get the word out to the investment community.

So when you're looking at a potential investment, check out the company's marketing plans. They can really help light a fire under profits … not just the firm's but also yours!

Yours for trading profits,

Sean Brodrick

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