Buffett finally warms to gold, takes $564M stake in Barrick
Sprott Inc. chief executive Peter Grosskopf has long fielded the same question while talking up gold to investors: Why does famed investor and multibillionaire Warren Buffett, the so-called Oracle of Omaha, hate the yellow metal?
Grosskopf may never have to answer the question again.
On Friday afternoon, after years of trashing gold as an investment, Buffett’s Berkshire Hathaway Inc. revealed it had switched course and purchased 20.9 million shares in Toronto-headquartered Barrick Gold Corp. in a transaction worth an estimated US$563.5 million at the end of the second quarter.
“I think that now he seems to have come around to the fact that he can be comfortable with gold as a store of value,” said Grosskopf, whose company specializes in precious metals investment.
“I think people are finally realizing it’s a legitimate part of a portfolio.”
Others seemed to quickly catch on: Barrick’s stock was up 11.3 per cent to $39.84 on Monday.
Barrick has been one of, if not the world’s largest gold producer for many years. In 2019, it produced 5.4 million ounces of gold, up from 4.5 million ounces in 2018.
That was after a multi-billion merger with Randgold Resources Inc. brought in a new chief executive, Mark Bristow, to assume management.
Previously, the company had only been operating with an executive chairman, John Thornton, a former Goldman Sachs banker.
During the past 12 months, Barrick’s stock has surged 65 per cent, steadily rising as a groundswell of investors flocked to gold as a safe haven amid declining real interest rates, economic uncertainty and a global health pandemic that is unprecedented in modern history.
Against this backdrop, the price of gold is now near its highest levels ever, at US$1,987 per ounce on Monday, part of what Grosskopf and others believe is only the start of a historic bull cycle.
Still, investors and analysts alike were at pains to parse what Buffett’s investment in Barrick — Berkshire Hathaway’s only new stock purchase during the second quarter, and one that accounts for less than 0.3 per cent of its portfolio value — signals about his views on gold.
Over the years, he’s disparaged gold as both a store of value and an investment.
“One thing I would bet my life on,” Buffett said at Berkshire’s 2012 annual meeting, “essentially, is over a 50-year period, not only will Berkshire do considerably better than gold, but common stocks as a group will do better than gold, and probably farmland will do better than gold.”
Based in Omaha, Neb., he is famous for his “value” investment philosophy, in which he buys stocks in companies that have fallen out of favour with the rest of the market, and are undervalued compared to their book value.
The gold sector doesn’t necessarily fit that profile, nor does Barrick.
“It’s not exactly as if Barrick’s on its knees and as cheap as it’s ever been,” Grosskopf said.
He predicted that Buffett would also invest in physical gold, and that his investments in Barrick and other gold miners would increase over time.
Jackie Przybylowski, managing director of equity research, metals and mining, at BMO Capital Markets, said Barrick Gold does not fit the classic “value” investment, given that it’s not out of favour and not struggling in any particular way.
“One thing that Buffet is probably looking for is a stock that has trade liquidity, and that probably trades in the U.S.,” she said.
“It’s a big fund, and they took a big position.”
Przybylowski said Buffett is likely now bullish on gold and felt comfortable investing in Barrick, though she doesn’t know for sure since he didn’t make any comment on the purchase.
BMO Capital Markets on Friday said in a note that the “stars have aligned for gold,” given the economic uncertainty, fallout from the pandemic, massive economic stimulus, weakening U.S. dollar and declining interest rates.
Gold miners have used the past few years to improve efficiencies and strengthen their balance sheets, setting them up to capitalize on higher gold prices, the bank’s analysts said.
Carey MacRury, an analyst at Canaccord Genuity who covers Barrick, also said it’s difficult to say exactly what drove Buffett’s investment decision.
MacRury noted generalist investors were already coming back into the market, enticed by increasing cash flows and dividends, the latter of which typically range between one and 1.5 per cent of yields, but have been ticking up at a few companies.
“I’m not sure we’ll ever know why he bought it,” he said, adding, “US$500 million, for him, is not a huge bet. It’s an investment in his portfolio and I don’t think it’s a stretch to say that given the outlook in interest rates and what the Fed is doing, gold is not a bad place to be.”