Warren Buffett’s flip-flop on gold recently sent shockwaves throughout financial markets, asserts Frank Holmes, CEO of US Global Investors and editor of Frank Talk.
Berkshire Hathaway (BRK.B) unexpectedly announced that, as of the end of the second quarter, it held a $565 million position in Barrick Gold (GOLD), the world’s second largest producer of the metal.
So why did Buffett change his mind? I believe he finally came to the realization that he could no longer afford to ignore gold and gold producers. But why gold specifically, and why now?
In case you haven’t noticed, governments around the world, including the U.S. government, have responded to the pandemic-caused economic slowdown by implementing unprecedented levels of monetary and fiscal stimulus.
With so much money being printed out of thin air, many investors have rightfully been concerned about currency debasement, which is the lowering of a currency’s purchasing power. The direct result of this is inflation since the U.S. dollar may not buy as much as it did yesterday.
It’s helpful to think of inflation as a “tax” on your wealth. Historically, investors have sought to avoid having to “pay” this tax by buying real assets such as land, real estate, natural resources and, yes, gold.
Although they don’t generate income the way some stocks and bonds do, these kinds of assets can be attractive because they’re believed to hold their value better than cash.
What about investors like Buffett who want exposure to gold but also seek income? That’s where gold mining stocks come in. Berkshire may not pay a dividend, but many gold stocks do, including Barrick. The Toronto-based producer, in fact, has been growing its dividend pretty regularly over the past 10 years.
Barrick’s one-year dividend growth rate as of this month was an attractive 35.3 percent, according to Bloomberg data. The company recently hiked its dividend by 14 percent to $0.08 per share as hundreds of other companies have had to suspend their payouts due to the pandemic.
It’s easy to see why Buffett chose Barrick as his entry point in metals and mining. It’s been a top performer. Barrick reported net income of $417 million on revenue of $3 billion in the second quarter, the most since 2013. For the year as of August 18, the stock has returned more than 62 percent
Buffett isn’t the only big-name investor who’s recently changed his mind about gold. In January 2019, billionaire investor Sam Zell, founder of Equity Group Investments, disclosed that he had bought gold for the first time in his life because he believes it’s a “good hedge.”
Later that year, hedge fund manager Paul Tudor Jones told Bloomberg that gold was his favorite trade for the next 12 to 24 months.
Will other anti-gold investors change their minds about the “barbarous relic,” to borrow British economist John Maynard Keynes’ famous jab of the precious metal? There’s no telling, of course, but what I can say is that I believe it’s getting harder and harder for investors to leave gold and gold mining stocks out of their portfolios.
