Commodity Investing

Should You Bet on Gold Alongside Warren Buffett?

Last Friday night, Warren Buffett’s investment vehicle Berkshire Hathaway (NYSE: BRK) disclosed that it had taken a $563.6 million stake in Barrick Gold Corp. (NYSE: GOLD) – the world’s second-largest gold miner.

Just shy of his 90th birthday, the Oracle of Omaha proved he can still move the market.

Barrick surged nearly 12% on Monday following the news of Berkshire’s investment.

Gold bugs were over the moon.

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Gold bug website Kitco’s headline screamed “Buffett buys gold.”

The news certainly took the mainstream investment world by surprise.

After all, Buffett had long derided the idea of investing in gold.

As he put it in a 1998 speech at Harvard…

Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.

Has Buffett embraced the investment case for gold – a commodity the English economist John Maynard Keynes called a “barbarous relic“?

Does Berkshire’s investment represent a U-turn in Buffett’s investment philosophy?

More importantly, should you follow in Buffett’s footsteps?

Look beyond the hype…

And you’ll see Berkshire’s investment in Barrick is a classic Buffett play.

No, Buffett Did Not Invest in Gold

First, let’s clarify the nature of Buffett’s investment.

Kitco was wrong. Warren Buffett did not invest in gold. Berkshire Hathaway invested in a gold mining company.

Here’s why this distinction is essential…

First, Buffett’s deputies, Ted Weschler and Todd Combs, have the authority to invest in stocks alongside Buffett on behalf of Berkshire. Berkshire may have bought Barrick with zero input from Buffett.

Second, Berkshire’s Barrick bet is relatively small, far south of $1 billion.

By way of comparison, Buffett’s Apple stake has tripled in value to more than $100 billion.

Berkshire is hardly betting the farm.

Third, Berkshire invested in a mining company, not a commodity.

A mining company can generate profits and pay dividends to shareholders. You can value a company using well-established financial metrics.

Yes, if gold goes higher, then Barrick can go much higher. But investing in Barrick is far from investing in gold itself.

Why the Bull Market in Gold?

The investment case for gold – a universal store of value – speaks for itself.

Gold is a safe haven asset.

A global pandemic threatening economic depression, a looming cold war with China and, above all, a global money-printing bonanza all make a bullish case for the price of gold.

U.S. national debt has almost doubled in the past 10 years. The Federal Reserve’s balance sheet has soared from less than $3 trillion to $7 trillion today. The European Central Bank’s balance sheet has nearly tripled since 2011.

If that’s not enough to drive the price of gold higher, nothing is.

How much higher can gold’s price go?

Goldman Sachs predicts $2,300. Bank of America is saying $3,000.

Some hardcore gold bugs predict $5,000, $10,000 or $20,000. One even predicts $50,000 per ounce.

Why Invest in a Gold Mine?

There are certain times to own gold and miners. And there are times not to.

With the price of gold in an uptrend, this is as good a time as any.

Still, the question remains…

Why would Berkshire – which never bets on macroeconomic trends like the price of gold – invest in gold miners?

Because gold miners are cheap. They have long been a much-hated asset. Shares of gold miners have trailed gold’s price for decades.

Gold hit an all-time high near $2,070 per troy ounce on August 6. But the gold miners are far off their highs.

The HUI Gold Index – the NYSE index of unhedged large cap gold miners – would have to rise by more than 70% to reach its old peaks. Junior miners would have to more than double.

Barrick is trading at the same price it was in 2006 when gold was just $600.

Put another way, Berkshire’s bet on Barrick is just an old-fashioned value play.

How to Bet on Gold and Gold Miners

Investing in gold was once illegal in the United States. Today, there are dozens of ways to bet on the price of gold.

You can buy physical bullion, bars and coins in stores. You can buy gold online and have it stored for you in vaults in Zurich or Singapore. I can even buy gold at my local mall in London from a vending machine.

Financial investors can buy options, futures and warrants on gold as well.

Finally, you can buy exchange-traded funds (ETFs). These can be leveraged or unleveraged.

Do you want to bet on the gold mining sector as a whole?

You can buy VanEck Vectors Gold Miners ETF (NYSE: GDX) or VanEck Vectors Junior Gold Miners ETF (NYSE: GDXJ) at the click of a mouse.

The Direxion Daily Gold Miners Index Bull 2X Shares ETF (NYSE: NUGT) offers a double-leveraged bet on the sector.

What’s the bottom line of gold miners?

Experienced investors will tell you mining stock manias never end well.

But recall the advice offered in Edwin Lefèvre’s Reminiscences of a Stock Operator: “In a bull market your game is to buy and hold until you believe that the bull market is near its end.”

As Berkshire’s bet on Barrick suggests, the current gold mining mania is just the beginning.

And Berkshire will likely “sell too early” – right before the grisly end.

Good investing,

Nicholas


About

An accomplished investment advisor and widely recognized expert on quantitative investing, global investing and exchange-traded funds, Nicholas has been a regular commentator on CNN International and Fox Business Network. He has also been cited in The Wall Street JournalFinancial TimesNewsweek, Fox Business News, CBS, MarketWatch, Yahoo Finance and MSN Money Central. Nicholas holds a bachelor’s and a master’s from Stanford University and a J.D. from Harvard Law School. It’s no wonder his groundbreaking content is published regularly in the free daily e-letter Liberty Through Wealth.

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