Warren Buffett has shocked investors by dumping shares in banks and buying into the world’s second-largest gold miner.
The renowned ‘value investor’ and CEO of Berkshire Hathaway has previously said investing in gold is a bad idea, as the precious metal produces no income and is worth only what other people are willing to pay.
But, as a recent filing with US regulators reveals, Mr Buffett now appears to be second-guessing himself and seeking comfort in crowds.
For while Mr Buffett’s recent enthusiasm for gold runs counter to his past views, gold always does well in a crisis and is currently tracking at record highs after breaking the $US2000 barrier for the first time in history.
In troubled times, panicked investors sell risky assets and funnel the proceeds into gold to protect their wealth, as the yellow metal is a ‘safe haven’ asset that normally holds its value during an economic shock.
And so one could reasonably conclude from Berkshire Hathaway’s decision to buy 20.9 million shares in Barrick Gold, while dumping shares in JPMorgan, Wells Fargo and Goldman Sachs, that Mr Buffett has lost faith in the global economy.
But market analysts said such a view is simplistic, as other forces are at play.
AMP Capital chief economist Shane Oliver said the move was a strange one for a self-avowed “value investor”, but could signal Mr Buffett is “taking a bet that inflation will pick up and interest rates will remain low”.
“There’s this view that inflation will pick up, thanks to central bank money printing and deficit spending by governments – and the US dollar would fall,” Dr Oliver said.
“And because gold is valued like other commodities in US dollars, that would benefit gold.”
Added to this is the fact that interest rates are at record lows, which means the ‘opportunity cost’ of holding gold is much lower.
That is, the income that investors could earn by owning other assets, and thus miss out on by holding gold instead, is much lower than it used to be.
“That has arguably made it cheaper to invest in gold,” Dr Oliver said.
And then there’s the earnings of Barrick Gold more specifically.
TradingView director of growth Glenn Leese said the company is up about 50 per cent this year alone and is reporting positive news and meeting its targets in spite of COVID-19.
“This makes them an attractive purchase,” he said, while noting that Berkshire had bought shares in a gold miner, which pays a dividend, rather than tens of thousands of gold bars.
“Regardless of Buffett’s personal view of gold as a commodity, the simple fact is that the price of gold is up more than 25 per cent this year, which means a huge increase in profits for gold producers.”
And past experience suggests things could get even better for the world’s second-largest gold miner.
“The upside potential for Barrick if we do slip into another major market correction could be as much as 80 per cent by simply returning to its previous highs,” Mr Leese said.
“It could be speculated that Buffett has chosen Barrick not only for the upside potential and strong fundamentals, but also as a hedge for a potential market correction.”
At the end of trading on Tuesday, a troy ounce of gold was selling for $US1939. This is down from a record high of $US2058.40 on August 6 but up more than 30 per cent since March.
Meanwhile, shares in Barrick Gold were trading at $US28.97 on the New York Stock Exchange at the end of August 24 – up from a low of $US15.67 on March 13.