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American super investor Warren Buffett is in gold in the second quarter of this year Stepped. His investment firm Berkshire Hathaway bought 20.9 million shares of Canada's Barrick Gold, one of the largest gold mining companies in the world. This is evident from new figures recently released by the US regulator. With this $565 million investment, Buffett took a 1.2% stake in the company. This is a remarkable step, because the value investor has been very critical of investing in gold several times in the past.
In 2009, Buffett described gold as a useless investment because it provides no cash flow and produces nothing. The latter may explain why he has now bought gold mining shares instead of Gold bars. The gold mining sector has been through a difficult period with high debt levels and tight profit margins. As a result, the mines were valued relatively low, also in relation to the gold price. However, now that the price of the precious metal has risen to record highs, the profitability of the mining sector is increasing significantly. So much so that even a risk-averse investor like Warren Buffett is joining this rally in the gold market.
While Buffett added gold mining stocks to his portfolio, he further reduced his position in bank stocks. For example, he sold all his shares in the American investment bank Goldman Sachs and sold 62% of his position in JP Morgan. He also sold a quarter of his position in Wells Fargo. Bank stocks have been doing quite poorly on the stock market for years, especially in Europe. The coronavirus crisis has further increased the risks for banks, putting pressure on bank share prices again this year. The banking sector is expected to suffer greatly from the corona crisis in the coming years, especially if more companies and households run into problems.
To date, Buffett's investment in the gold mining sector has not done any harm. He paid $565 million for his position in Barrick Gold, while at the current price of $31 per share, it is worth nearly $650 million. That is already almost 15% more than what he paid for it in the second quarter. It is not the first time that Buffett has taken a position in precious metals. In 1997, he bought nearly 130 million troy ounces of silver at a price of less than $6 per troy ounce. A year later, the Silver Price to almost $8 per troy ounce.
In 1998, Buffett described gold as a useless investment because it produces nothing. "Gold is extracted from the ground somewhere in Africa, then we melt it down and dig another hole. That's where we put the gold and then we pay people to guard it. It's useless. Someone looking at it from Mars would be scratching their heads."
In 2010, when the Gold price much higher, he said the following about gold: "You can put all the gold that has ever been mined in a 21-cubic-metre cube. For the value it represents at the current gold rate, you can buy all the farmland in the United States, plus ten oil companies like Exxon Mobil. You'll still have $1 trillion left to spend. Or you can have that big cube of metal. What would you choose? What's going to produce more value?"
The arguments that Buffett puts forward here are valid, but certainly not complete. It is true that gold has little productive value, but that is precisely the strength of the precious metal. Precisely because it has so few useful applications - and because the supply is relatively constant and predictable - the precious metal can serve as an excellent alternative means of savings.
Although gold does not generate cash flow, it does not have any counterparty risk either. This makes the precious metal an attractive alternative for parking capital. Especially if other investments are too risky or yield less return, for example due to negative interest rates. In addition, the value of the precious metal cannot be affected by reckless policies by central banks and governments. Over the centuries, gold has proven itself as an instrument to protect assets against all forms of currency depreciation.
This property makes gold very popular at the moment. The fact that the precious metal has so few useful applications is therefore not a disadvantage, but rather an advantage. Anyone can put part of their wealth into gold without adversely affecting the purchasing power of others. The return of gold is in the increase in value that follows as there are more savings that are parked in gold. In recent years, this yield has been greater than the interest on a savings account.
Also Read:
- Warren Buffett ignores stocks
- Gold mine discoveries down 85% in ten years
This contribution was made from Geotrendlines
