For generations, investors of all kinds have looked to Warren Buffett for investment insights.
His famous annual letters to Berkshire Hathaway (BRK/B) shareholders are as good as any investment textbook… and infinitely more entertaining. More than 40 years of his annual letters are accessible here.
While you’re there, don’t forget to click on the 2011 letter. Among other things, you’ll learn Buffett’s thoughts on gold… which, at that time, was about to hit its post-2009 high.
In a nutshell: He had no use for it. He wrote that cropland and dividend-generating stocks (such as Exxon) would probably be better investments for the next 100 years.
Well, everyone has the right to change their mind…
Moreover, we tend to lose out if we don’t adapt to the world around us.
Late last week, on August 15, we learned about Warren Buffett’s new position, purchased during the second quarter (Q2) of the year: Barrick Gold (GOLD).
As I recently told my Moneyflow Trader subscribers, it’s impossible to overemphasize how big a deal this is, both for the gold market… and for Buffett’s style of investing…
Long ago crowned “the greatest investor of all time,” Buffett earned this title by being smart, shrewd, consistent, and opportunistic… everything you’d want in a stock picker or money manager.
Buffett’s holding company, Berkshire Hathaway, owns a portfolio of “productive” companies, historically varying from manufacturing to transportation to consumer staples to banks… and now to technology, via a huge position in Apple (AAPL) and a tiny stake in Amazon (AMZN).
He likes “franchises”—companies largely in command of their own destiny because they own strong brands or unique products, like Coca Cola (KO) or Procter & Gamble (PG). He also likes companies that command a large share of an important market, like Kroger (KR) or JP Morgan Chase (JPM). Or companies that have both characteristics, like Visa (V) or Apple.
This uniquely Buffett spin on value investing has paid off—Berkshire has massively outperformed the market over the past two decades (up 410% vs. the market’s 126%).
But as I mentioned above, Buffett’s never considered gold a worthwhile investment… until now.
Buffett’s Barrick purchase reinforces that Big Money investors are seeing “productive” qualities and potential value in gold stocks… that this sector is getting new converts every day… and that we’re in a new bull market for gold.
Yet Buffett’s recent venture still has many skeptics…
They’ve argued that:
- Buffett’s position in Barrick is very small…
- It may not have been Buffett’s original idea…
- Barrick was likely bought early in the second quarter 2020—when the market was still trading at bargain territory—so today it’s no longer the bargain it was back then…
- Barrick isn’t your normal mining stock—that because it pays a dividend, it fits with Berkshire Hathaway’s “value stock” profile…
The way I see it, these arguments only highlight the importance of Buffett’s pivot to gold.
Let’s break them down one by one…
No. 1: Position size
Yes, the new Berkshire Hathaway position in GOLD is comparatively small—only 0.3% of the portfolio.
Still, this amounts to as many as 20.9 million shares, and about 1.2% of all shares outstanding.
More importantly, it’s an indication of a change of heart—and a signal for all of us that gold is no longer to be mocked.
Also consider that Buffett dumped a significant amount of banking stocks while buying GOLD… making the trade-off between fiat money and precious metals even more pronounced.
No. 2: Idea origination
We don’t know who originated this trade. But given how vocal Buffett was about his gold views, I highly doubt anyone would have been able to slip a purchase of 21 million precious metal shares past him. It doesn’t matter whose original idea GOLD was—the fact that it was executed is all that matters.
No. 3: Timing and potential appreciation
It’s normal not to know when exactly a Big Money portfolio buys or sells a specific stock. And it’s OK. What’s important to know is that during the second quarter (Q2) of 2020, Warren Buffett did more selling than buying, and GOLD stands out as a brand-new buy in a treacherous market.
And don’t forget that Buffett’s favorite holding period is “forever.” He rarely trades… his buys are mostly conviction buys.
No. 4: Valuation
Like the rest of the gold miners, Barrick is leveraged to the price of gold. Because production costs are largely fixed, at a certain level, profits are almost a linear function of price (although, to be fair, the breakeven selling price differs from miner to miner).
Barrick and other gold miners, thanks to the sharp increase in the price of gold, are now able to pay down debt… see higher cash flows… and hike dividends. Many of these companies will look cheaper and cheaper the higher the gold price goes.
And Barrick—which has been paying a dividend to some degree since 1984—can now afford to pay out a higher amount to shareholders. In fact, just last week, following an 84% year over year earnings spike, Barrick hiked its quarterly dividend by 14%.
But this wasn’t the first time over the past year Barrick has increased its payout…
A year ago, in August 2019, it paid $0.04 per share in quarterly dividends. The next payout, after this increase, will be $0.08 per share.
In today’s economy, it’s hard to find companies with this kind of recent dividend growth.
But Barrick isn’t the only dividend-paying gold-related stock out there. From Barrick to Newmont Corp. (NEM) to AngloGold Ashanti (AU), major gold miners have been taking advantage of an uptrend in gold (and the growth in their cash flows) to hike their payouts.
No wonder Big-Money investors have been flocking to precious metals.
Gold isn’t a “sure thing”—nothing is. Even Buffett makes mistakes. But today, it’s not to be ignored either… Buffett invests for the long haul. And his pivot is telling us he expects gold prices to continue higher.
Editor’s noteYesterday, Genia released her favorite way to play today’s gold bull market to Moneyflow Trader members… a trade with triple-digit upside.
Subscribers have already collected average gains of nearly 250% in two other precious metals plays this year. And odds are good these winning calls won’t be the last…
Listen as Frank explains why Genia’s Moneyflow Trader strategy is the best way to play defense—and profit—in this uncertain economy.