‘Better late than never’: Warren Buffett bets on gold

Warren Buffett has never been a big fan of gold. At Berkshire Hathaway’s annual general meeting in 2005, the billionaire investor said the precious metal “would be way down on my list as a store of value” and “I would much prefer owning a hundred acres of land near Nebraska, or an apartment house, or an index fund.” And while that response to an investor’s question is now fifteen years old – his views on gold haven’t seemed to change very much over the years.

Or have they? This week, the world’s fifth-richest man surprised a lot of us, despite the soaring gold price, when filings to the U.S. Securities Exchange Commission revealed that during the second quarter, Berkshire Hathaway had purchased US$565 million in shares of Canadian miner Barrick Gold.

Since the news broke, I have spent some time canvassing the views of respected industry watchers. One of my favourite comments came from Pierre Vaillancourt, a veteran mining analyst in Toronto: “My initial reaction would have to be: ‘Better late than never’ – kind of like when he got on board with Apple or other tech stocks.”

CPM Group’s Jeffrey Christian helped put the investment into context by crunching the numbers. At current prices, he says, Berkshire Hathaway’s investment represents 18.5 million common shares, or about 1% of Barrick’s total share count. Berkshire Hathaway had US$707.8 billion in assets under management as of the end of 2018, he says. “It probably is substantially higher now, but at that level, the Barrick stake would have accounted for 0.08% of Berkshire Hathaway’s assets under management. It accounts for 0.3% of Berkshire Hathaway’s equity holdings listed in the 13F filing with the SEC on Aug. 14.”

In other words, Christian says, Berkshire’s shares in Barrick “are relatively insignificant to both Barrick and to Berkshire Hathaway and BH is far away from having what portfolio models would suggest is an effective exposure to gold mining shares.”

Good point. But even so, Buffett’s move into gold, no matter how small, has really caught the world’s attention. And while his top five investments are still Apple Inc., Bank of America Corp., Coca-Cola Co., American Express Inc. and Kraft Heinz Co., news of his tiny foray into one of the world’s biggest gold mining companies “is an important fillip for the sector,” Chris Hinde, director of Pick and Pen Ltd., a U.K.-based consulting firm, tells The Northern Miner.

For a man, Hinde says, who once commented that investing in gold had “no utility” and who “generally focuses on long-term returns,” his move into gold “suggests Berkshire Hathaway is in for the duration.”

“Famous for his value-based investing model, Buffett has long held the belief that investors should focus on industries that they understand (he avoided the Dot-com bubble) and on companies that exhibit solid fundamentals, strong earnings power, and the potential for continued growth,” Hinde says. “The gold-mining sector is not an obvious bed-fellow for Berkshire Hathaway because it restricts investments to businesses that can be easily analyzed. However, Buffett also places high importance on transparency and on companies that make innovative strategic decisions and have high profit margins.”

For his part, CPM Group’s Christian says no one should have been surprised by Buffett’s purchase of gold shares. While Buffett has spoken in the past about how owning physical gold was not a good investment because (he incorrectly stated) it does not return a yield or dividends, Christian argues, it can and does for savvy investors.

“Warren Buffet has spoken about the wisdom of investing in productive assets,” Christian says. “In other words, gold mining companies instead of physical gold.”

And in this, Christian reasons, he is no different than Adam Smith, who wrote in his 1776 classic, The Wealth of Nations, “that one’s wealth is not measured by how much gold, silver, and cash one has in one’s safe, but rather by the amount one has invested in assets that produce more wealth, that is, companies.”

“Smith, like Buffett, knew that anything one can earn interest on, including cash, gold, and silver, depreciates over time,” Christian concludes. “Protecting against such long-term depreciation and other catastrophic events that can reduce the buying power of such assets depends on investing in companies that can generate new, additional wealth, at a rate equivalent to or greater than the depreciation of such assets.”