In the second quarter of 2020 Berkshire Hathaway purchased a 20.9 million shares stake in Barrick Gold ( a gold mining company). These shares worth $564 million which make Warren Buffett the 11th biggest investor in the Barrick Gold Corporation.
Warren Buffett's investment in a gold mining company seems so surprising to other well-known investors because he didn’t buy gold in his entire investing career. At Berkshire shareholder meeting in 2012, Warren said,
I mean, if you own an ounce of gold now and, you know, you caress it for the next hundred years, you’ll have an ounce of gold a hundred years from now.
Here is another of his famous quote about gold:
“[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. ”
It is clear that Warren Buffett doesn’t like gold investments. And the common reason he portrayed is that gold earns nothing if you hold it. The investment decision in Barrick Gold was broadly considered to be made by Berkshire’s investment managers Todd Combs or Ted Weschler.
But another interesting thing happened in November 2020 where news was revealed that Warren Buffett sold out 9 million shares of ABX which leads to divesting 43% of the shareholding.
The professional investors give two reasons for Berkshire's investment and divestment in Barrick Gold Corporation.
So, let’s explore them.
High Uncertainty Due to COVID19
You know 2020 was a heavy year for all of us. Lots of unpleasant events happened around the world and in the USA we can’t remind. But the biggest one was COVID19 which is still present in 2021.
Coronavirus result in a big economic downturn and high uncertainty after the 2000 Dotcom disaster and 2008 recession.
In times of higher uncertainty investors whether individual or group tend to seek a safe place for their dollar amount and also want capital gains. And the only option left for securing their paper money is buying gold. Now why they prefer gold is because you can take away gold anywhere with yourself unlike stocks and real estate.
The uncertainty was so high in the beginning two quarters of 2020. No one knows what is going to happen in the future. In fact, until mid-March 2020 20.6 million Americans lose the job which leads to a 14.7% unemployment rate which was more than double as compared to 8.7 million during 2007–2009 economic recession.
The gold performed well in the second and third quarters of 2020. It climbed to its highest price $2067 in August 2020.
For the sake of hedging, Berkshire purchased 20.9 million shares ( around $564 million) of Barrick Gold. When the information is disseminated about Warrens Berkshire's investment, the ABX share surged to the highest price in the last 7 years and gained 62% in value.
But after the news that the coronavirus vaccine is discovered the uncertainty starts minimizing. And you know that decrease in uncertainty leads to an increase in the price of stock and vice versa. As a result, the Gold price started decreasing from over $2000 to below $1350 as of January 2021.
That’s why Berkshire’s again took a move towards divesting 9 million shares (43% shareholding) from Barrick Gold to invest in other shares.
Low-Interest Rates And Higher Inflation
The decrease in the interest rate and increase in inflation are considered as pleasant for the gold. As the interest rate drops and inflation climbs two major things happen:
- People get an opportunity to borrow more money and spend it which increases the money supply in the economy. When the money supply increases the inflation increases and the value of the dollar decreases.
- Investors take money out of stocks, bonds, and other securities issued by the government and invest in gold to secure their money. As a result demand for gold increases and hence its price starts to climb high and high.
- The Fed continues on printing more funny money out of thin air and so the dollar gets weaker against gold. As the dollar goes weaker, more and more dollars are required to purchase an ounce of gold.
This is what Irving Fisher put forth in his Quantity theory of money which states that change in price is related to change in the money supply. In other words, an increase in money supply increases inflation and vice versa.
According to BBC in August 2020 the Fed decided to maintain an average rate of inflation at 2% while having flexibility for an increase to help the American economy to recover from the COVID19 crisis. They decided to maintain the interest rate near zero which is 0.25%.
The Fed Chairman Jerome Powell:
The coronavirus economic shock appears to be the largest on record. The fiscal response largest response for any post-war downturn would be pardon me at the Fed. We’ve also acted with unprecedented speed and force after rapidly cutting the federal funds rate close to zero.
This was a positive opportunity for Berkshire to invest in Barrick Gold shares to generate profit. And the same happened that the share climbed 62% in value. When the coronavirus vaccine news pumped out the risk start reducing which led to a decrease in gold prices and a decrease in the share price of gold companies. So Berkshire Hathaway sold out 9 million shares out of 21 million from Barrick Gold.
It depends on how long the US economy takes to recover from the COVID19 crisis. If the recovery period goes longer then gold gives better performance than stocks but if not then obviously the stock market will boom.
There are two key takeaways from the whole discussion on Warren Buffett's investing decisions.
First, buying gold is different from buying a gold mining company. If you analyze the investing decision then it is clear that Berkshire’s purchased stocks of Barrick Gold.
“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.
You could take all the gold that’s ever been mined, and it would fill a cube 67 feet in each direction. For what it’s worth at current gold prices, you could buy — not some — all of the farmland in the United States. Plus, you could buy 10 Exxon Mobil (XOM), plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?”
The above quotes are about gold and don’t apply to BGC investment which is buying a shareholding. And Barrick Gold has been increasing its dividend for the last 10 years. In fact, they raised their dividend up to 25% in 2019.
Second, Berkshire’s invested a tinny part of their whole capital in ABX shares. Their market capital was $552B in January 2020 and $564M is a fraction as compared with their capital. So they take little investing moves for either testing their investing strategies or earning dividends.