Buffett Makes An Investment He Never Thought He Would (Gold). Here’s Why

Speaker 1: I’m going to be honest, when I initially saw this, I thought it was an April Fool’s joke, but of course, we are many months away from April and it was no joke. Warren Buffett has finally bought gold. His investing company, Berkshire Hathaway, has bought twenty point nine million shares in the stock Barrick Gold Corporation with a total value of five hundred sixty four million dollars. So technically, he did not directly buy gold, but he bought a company that mines and sells gold. Now, this is interesting because those of you who know Buffett will know that he is best investing in gold for a long time now. He said back in the day that gold gets dug out of the ground in Africa or someplace, then we melted down, dig another hole, bury it again, and people pay to stand around. Guarding it has no utility. Anyone watching from Mars would be scratching their head on CNBC. He went even deeper into why he doesn’t like gold. Here’s the audio.

Speaker 2: I will say this about gold. If you took all of the gold in the world, it would it would roughly make a tube sixty seven feet on a side. So if you took all the gold in the world, we could have a cube went down there, 67 feet, 67 feet high. And that would be the hole right now for that same cube of gold. It would be worth at today’s market prices, about seven trillion dollars. That’s probably about a third of the value of all the stocks in the United States. So it could have a choice of owning a third of all the stocks in the United States. Or we could have a choice of owning a little block of gold, which can’t do anything but kind of shine there and make you feel like Midas or Christmas or something of the sort. Now, for seven trillion dollars, there are roughly a billion far acres of farmland in the United States. They’re valued at about two and a half trillion dollars. That’s about half the continental United States is farmland. You could have all the farmland, the United States, you could have about seven Exxon Mobil’s and you could have a trillion dollars of walking around money. And if you offered me the choice of looking at some sixty seven foot cube of gold and looking at it all day, you know, touching, fondling it occasionally, you know, and then saying, you know, do something for me. And it says, I don’t do anything. I just stand here and look pretty. And and the alternative that was to have all the farmland of the country, everything, cotton, corn, soybeans, seven, Exxon Mobil, just think of that and a trillion dollars of walking around money. I, you know, maybe call me crazy, but I’ll take the farmland of the novels.

Speaker 1: But then 20/20 comes around. We look at his 13 filings and what do we see? None other but a gold company. And there over 500 million dollars of Barrick Gold Corporation bought. So the question must become why the change of tune? Why now in these current market conditions does Buffett decide to invest in gold? This Charlie Munger clip might give us a bit of a hint as to why,

Speaker 3: I suppose the one time when a single mother might want to own gold compared to anything else, the conditions like you in Vienna in nineteen thirty nine, or I mean, there are conditions you can imagine where some form of transportable wealth would be useful compared to anything else. But absent those extreme conditions, I think it’s for the birds.

Speaker 1: So there are a few conditions in terms of the economy, in terms of the stock market where Munger believes it is a smart investment to buy gold. And we might be seeing these conditions in today’s economy. But also remember this. It’s not like BofA has gone and put a massive position on gold. Five hundred and sixty four million dollars might seem like a big investment to most people, but because it only makes up zero point two eight percent of the entire portfolio, nevertheless, it is a change of change for Buffett’s. And I want to go over some potential reasons why his investing company is buying gold. The first thing that we need to understand is that he uses cash to buy gold. So if Buffett wants it, he could leave this five hundred odd million dollars in cash. The only problem with this is that cash is very quickly becoming devalued in today’s environment. We all know that the Fed Uncle Jerome has been printing a lot of money over the past couple of months in the form of stimulus checks and loans. He’s done this to prop up the economy. Over just three and a half months, the Federal Reserve has printed a little over three trillion dollars to help American citizens and businesses. The problem with this as it devalues the current money in the system. I’ll give you an example, let’s say there were three trillion trees in the world and they were each worth 100 dollars, but then you planted an extra three trillion trees while those original trees would not be worth as much. It’s just a simple supply and demand equation, and that’s what’s going on. Now, the Fed is printing a lot of money and this devalues the currency, a.k.a. inflation. One of the first things you learn in economics, however, when you take a look at gold, you can’t just print more gold. I mean, don’t get me wrong, I wish we could, but it’s not possible. There is a set amount of gold in the world and therefore you can’t just devalue it by making more. This is one reason why a lot of investors believe that gold is a great symbol of safety for when times get volatile or risky. So, you know, Buffett’s finally in the 70s, however many years he’s been investing, decides to buy gold. Now, there are a couple of ways that you can buy into gold. The first is directly buying that. Normally people do this through an ETF, which basically just holds a bunch of gold and vaults and tracks its price. The second way, which both Buffett and I believe is a smarter way, is by buying a company that mines gold. Now, I just want to explain the basic concept of why this is a smarter way to own gold. OK, you’ve got Barrick Gold. They’re currently earning eleven point three billion dollars in revenue. Their expenses are seven point nine billion. That gives them profits of about three point four billion dollars. OK, now, let’s just say that over the next couple of years, the price of gold doubles a few directly on gold. Your investment, therefore, doubles in size. But if you own a gold miner like Barrick Gold, it’s a different story because now their revenue doubles, which would mean they now have twenty two point six dollars billion, but expenses stay the same as seven point nine billion. That means profits now becomes fourteen point seven billion dollars. Basically, that’s just quadrupled in terms of profits. And investors make a lot more money now compared to you if they just own gold directly. Does that make sense? I hope it does. But I’m sure this is a big reason why Buffett has chosen to go with a gold miner instead of directly owning gold. Now, the gold miner that Buffett chose to go with, as I mentioned multiple times in the video, it’s called Barrick Gold. The interesting thing about Barrick Gold is it’s a company that I’ve personally mentioned multiple times in 2019 about being a smart way to invest in gold. Who knows? Maybe Buffett’s been sneakily watching some Koopa Academy videos. And that’s obviously a joke. But I like to dream anyway. I do want to delve a little deeper into the stock that Buffett’s bought. So Barrick Gold is actually a gold and copper mining company based in Toronto, Canada. They produce gold and copper and 13 different countries and the likes of the USA, Argentina, Zambia and Papua New Guinea that currently the second largest gold mining company in the world. And they’re expecting to produce between four point six to five million ounces of gold in 2020. It’s a lot of gold. Looking at the numbers, they’re currently selling at around 30 dollars per share. Buffett, he bought in a bit before this. So that’s around the twenty five to twenty seven dollars range. And yeah, it’s a relatively big company that’s around that 50 billion dollar market cap. And just numbers wise, really, as a Buffett style investments, the p e ratio is twelve, which in today’s environment is quite low for stock as well as this, they pay a nice dividend of one percent. So what can you say? It’s an interesting change of tune from Buffett and the normal approach that they take Abkhasia. And I’m sure Ray Dalio, he might be reading this news with a little bit of a smirk on his face because years ago he was saying Buffett is making a mistake by not buying gold. Here’s what he said.

Speaker 4: I think gold should be a part of everybody’s portfolio to some degree because it diversifies the portfolio. It is the alternative money. We have a situation now where when you have too much debt, too much, that leads to the printing of money to make it easier to service. So all of those things mean that some portion should be an end goal. Warren Buffett won’t touch gold. OK, yeah. You think he’s wrong? I mean, clearly, you must I, I think he’s making a big mistake. You know, gold is like cash. It’s an alternative version of cash. So in the long term, it’s it’s not. The best investment over the long term, it’s, you know, a little bit better than cash over the long term. It is, however, when you’re having a monetary crisis, when you have a fiat monetary system and you have the need for money, that is a promise to deliver money. Right. So if you look at each of those devaluations that have taken place in March 1933, President Roosevelt closes the banks and then opens them and says, you can get your money. And then they broke the link with gold. And so the history over that period of time is that money can be produced. Gold is somewhat limited. It’s ineffective. It’s an alternative that should be part of everybody’s portfolio, but not in a big way.

Speaker 1: Basically, what Dalio is saying is what I was trying to show you earlier on, you can keep cash, but that’s getting devalued at a high rate of knots. Gold, it tends to hold its price, especially when times are tough. That’s why I personally made a decent sized investment in gold a couple of years ago, because I tend to agree with Dalio when he says it is prudent to have a well diversified portfolio that is five to 10 percent and gold. I personally use it as a portfolio hedge. OK, what I mean, let’s say your stock part of your portfolio crashes in cash, gets devalued. Well, in these conditions, it’s likely that gold is going to be at the very least, holding its value, probably going up. So the example I use is the last 07 08 recession here, gold and the crash and the couple of years following the crash went up by two and a half times. That’s exactly what a hedge is meant to do. But even with all of the said, I got to say I was surprised when I saw Buffett’s Berkshire Hathaway buy gold. That’s just something that I never thought he would do. But, you know, sometimes you have to go against your old ways and form new opinions on things. And I think it’s a smart investment from Buffett personally, whether you like it or not. These are volatile times that we’re in. We’re in market conditions that we’ve never seen before. So I don’t see anything wrong with having a safety hedge in the form of gold.

Leave a comment

Your email address will not be published. Required fields are marked *