Tales from the Bull Pen: Golden Cycle

Earlier this year, I wrote a story about my first year in the investment business, 45 years ago in 1977. I got a lot of interesting feedback on it, and most people seemed to enjoy the story and the history lesson. So I think I might do a few more stories like that this year. (At my age, you become a walking history book, if you can remember it.) As you may recall, in those days, most of the newer brokers were in cubicles in an open area in the office, which we affectionately called the “Bull Pen” for obvious reasons. It was loud and chaotic.

In the last 15 years or so, the number one question I was often asked was, “should I buy gold?” Recently that is the second most often asked question. The number one question now is, “should I buy Bitcoin or some other cryptocurrency?” But that’s a story for another day. My standard answer to either question is, “I don’t know, but I always recommend that if you are going to invest in gold, don’t invest more than you can afford to lose. If you are trying to do it for a short-term trade, that is very risky, and few people can do it successfully.”

In 1979 I was two years into the investment business at Dean Witter, and I came across a story about a company named Golden Cycle. Golden Cycle, at one point, was a mining company that owned several gold mines in the Cripple Creek, Colorado area. By the 1940s or 50s, the gold price was still fixed at $35 an ounce, and it was no longer profitable to mine gold at that price. So the mines were closed.

In the 1960s, Golden Cycle changed its business model and became a small transportation company in the moving business. They were known to have several contracts with the US Government to move military personnel. They were mildly profitable and still a fairly small company that didn’t generate too much news.

In the late 1970s, as gold prices rose and inflation started to rage, gold became a hot topic. I recall in 1979 that I had clients who would never do anything risky or speculative, calling me to ask about investing in gold and silver. It was really crazy, and gold fever had struck again.

Texas Gulf (TG) was a very large mining company in those days. Suddenly, it was announced that they had entered into a joint partnership agreement with Golden Cycle to do some testing to see if it might be worth opening the mines in Cripple Creek again. TG would certainly have the expertise to evaluate that. It was a small, largely unheralded story that few people paid attention to. But the real story was that if (and it was a big “IF”) the mines could be opened profitably, suddenly this sleepy little transportation company would become the newest hot gold mining stock in Northern America at a time when gold was going crazy. This looked like an opportunity.

As background, the biggest difference between then and now is that until 1975, ordinary Americans were barred by law from buying and owning gold. About the only route available to participate in the earlier stage of the precious metal rally was by hoarding silver dimes, quarters, and half dollars minted before 1965. But that changed in 1975.

By 1977, gold had fallen to $103 per ounce, a decline of nearly 50% from the roughly $200 it had sold for in the closing days of 1974. The $200 price had capped a furious three-year rally that began in August of 1971 when President Nixon “temporarily” closed the gold window and allowed gold to float freely.

Few realized at the time that the real economic pain of the 1970s had (to paraphrase The Carpenters 1970’s hit) “Only Just Begun.” When inflation and recession came back with a vengeance in the late 1970s, gold took off like a rocket in flight. By January 1980, gold topped out at $850 an ounce.

As I started researching Golden Cycle, it looked like it could be an interesting speculation. It traded on the American Stock Exchange under the ticker symbol GCY. I began to talk to my clients about it, and everyone was intrigued by the story. Of course, I made it very clear that it was a purely speculative play that could be quite profitable if it worked out or a trade that would end badly if it didn’t. I even bought some for myself. I called the company CFO to ask questions, and of course, he wouldn’t tell me anything other than what was publicly announced. Still, it looked promising.

From early 1979 to the summer of 1979, I told the story to whoever would listen, and we acquired a lot of shares. In fact, since it was a small company, I was soon carrying almost 10 percent of the company stock in the accounts of my clients. We started buying at about $10 a share up to about $15 a share. In August 1979, the stock started moving rapidly higher, and I think it got over $20 a share. Now it was getting really exciting. Gold was going up rapidly, and so was the stock. It looked like something was about to happen.

Suddenly the stock exchange halted trading in the stock pending an announcement. This was it! We were about to score big! Then the announcement came. Texas Gulf announced that they didn’t think the remaining gold could be mined profitably, and they were pulling out of the deal.

Trading in GCY remained closed for three days due to an “imbalance of orders.” In other words, all sellers and no buyers. The stock finally opened at $5 a share. Ouch! Needless to say, we were all disappointed, but we moved on to lick our wounds. Fortunately, every one of my clients understood it was a speculative trade that could possibly not work out, but that didn’t ease the pain any. I remember it as one of the toughest days of my career when I had to call all my clients and tell them the story. I don’t know whatever happened to Golden Cycle, and I guess they either went out of business or were eventually acquired by another company. Today, Cripple Creek is a tourist attraction in Colorado.

So I tell you this story as a bit of history lesson in gold, but also about the risks and dangers of speculating. That was the beginning (and end) of my love/hate relationship with gold, and I never made a high-flying trade like that again. Lesson learned. Thanks for reading.