It is little wonder that Warren Buffett’s move into gold should cause such a stir.
After all, the world’s greatest investor has had some very negative things to say about gold in the past, such as gold “has no utility’’ and that “anyone watching from Mars would be scratching their head.”
While it is true that Buffett has been negative about gold, it is worth pointing out a vital distinction in that Buffett’s Berkshire Hathaway bought US$563 million of shares in a gold miner in the form of Canadian gold giant Barrick Gold Corporation.
Buffett didn’t buy a passive gold holding
There is a very big difference between buying physical gold which sits in a vault and produces nothing but insurance and security costs and a highly profitable gold miner such as Barrick, which pays investors a dividend.
Investors who buy physical gold are punting only that the price will go up substantially so that they can make a profit and have a hedge against inflation or currencies.
Buying shares in a gold miner is quite different – you do get exposure to movements in the gold price due to the fact that the miner owns many millions of ounces of gold within its mines.
But you also get industrial exposure to a company that is mining gold at a certain price and selling it at the market price – or a hedged price that it has agreed to earlier.
Barrick is highly profitable at current gold prices
In the case of Barrick, its forecast total cash costs per ounce of gold are US$650-US$700 an ounce compared to the current price of gold which is hovering just under the US$2000 an ounce mark.
Taking into account all of Barrick’s operating costs, its forecast “all-in sustaining costs per ounce” are in the range of US$920-US$970 an ounce.
It has also generated US$1.5 billion by disposing of non-core assets since the 2018 merger with Randgold – US$1.25 billion of which was in cash.
What that tells you is two very important things.
. Barrick is heavily exposed to any rise in the gold price, given it produces around 4.6 million to 5 million ounces of gold a year at prices well below the current gold price.
. Barrick is highly profitable, with significant earnings and free cash flow (around US$4 billion a year) from gold and copper mining and it will remain profitable even with a much lower gold price.
As you can see, this shows a very stark difference between Buffett “buying gold’’ that is sitting in a vault somewhere and his more usual activity of buying into a highly profitable company that pays dividends.
Looking for companies that are immune to COVID
What is true about this move is that it shows that Buffett is looking to buy companies that are less susceptible to having their earnings reduced by the progress of the COVID-19 virus.
Which is entirely consistent with his moves so far to sell out of airline stocks and to marginally reduce his exposure to banks and other financial stocks.
Buffett’s early decision to get out of airlines was made on the basis that it would take a long time for travel to return to pre-virus levels – something that looks like being very much the case.
Similarly, his decision to reduce Berkshire’s holdings in financial institutions such as JPMorgan and Wells Fargo (but to buy more of Bank of America) makes sense, given the bad debt and lower financial activity headwinds that have accompanied the virus.
Gold mining, by its very nature, is a largely socially distant activity, particularly in the very large mines that Barrick operates around the world.
Barrick’s costs will not change very much due to the virus and there should be very little impact on its production.
Buffett’s position is consistent
All of this is very consistent with Buffett’s long-standing opposition to “buying gold” which he stated clearly in a 2009 interview on CNBC.
“I have no views as to where it (the gold price) will be, but the one thing I can tell you is it won’t do anything between now and then except look at you. Whereas, you know, Coca-Cola will be making money, and I think Wells Fargo will be making a lot of money, and there will be a lot — and it’s a lot — it’s a lot better to have a goose that keeps laying eggs than a goose that just sits there and eats insurance and storage and a few things like that.”
In effect, Buffett has bought the goose that lays the golden eggs in the form of Barrick and not the eggs themselves – although he retains a useful exposure to a higher gold price anyway.
That is not to say that Buffett’s move will not have ramifications in the gold and other markets.
It immediately caused an uplift in Barrick’s value and has led analysts to look at the effect on other assets that tend to move upwards with gold.
Could Buffett buy Bitcoin?
One of those is Bitcoin, which some see as a form of digital gold, given that it is “mined” on computers and its supply is limited compared to paper currencies.
While Bitcoin has outperformed gold since April, there has been a correlation between the two assets which shows that Bitcoin is being seen by many as a store of value at a time when central banks have been particularly busy producing fiat currency.
All of which has led to some speculation that perhaps Warren Buffett could be preparing to move on Bitcoin.
Heisenberg Capital founder Max Keiser points out that Buffett has missed out on numerous prosperous investments such as Tesla and Amazon, and believes will likely start ‘panic-buying’ Bitcoin if it reaches US$50,000.
It is true that his Berkshire Hathaway has made a lot of money investing in profitable technology companies such as Apple.
However, it is a stretch to believe that Buffett would be tempted to buy Bitcoin, given that the digital currency does not generate a yield other than price appreciation.
Holding to the example of his investment in Barrick, Buffett would be much more likely to buy into a profitable company that dealt in the cryptocurrency space by offering services.
While it may be highly unlikely, if you are Warren Buffett, you would never say never.