Warren Buffett Did What?!?

One piece of news from last week that certainly helped gold early this week was that Berkshire Hathaway invested in Barrick Gold. Yes: Warren Bufffet, a loud and longtime gold detractor, invested US$565 million in the world’s second largest gold miner.

Buffett is a value investor. He has said many times that gold is unproductive, unpredictable, and useless. So news of this move certainly took the market by surprise.

Lots of points to make:

• Gold producers are standing out among equities for strong balance sheets and earnings forecasts. That suggests Buffett sees Barrick as a value play. He doesn’t have to think that gold is going to the moon – as long as he thinks gold prices will remain strong for several years, then Barrick is a value buy.

• Taking that one step further: gold companies might now be in the early stages of being thought of as real businesses. A history of poor capital allocation plus a commodity with wide price swings has segmented gold miners to the side, as a niche sub-sector not to be trusted. But in the last bear market and in the sideways years since gold miners have largely said and done the right things, such as basing their budgets on conservative gold price forecasts, focusing on margin and free cash flow generation, streamlining operations, and emphasizing dividends. Buffett’s move suggests this C-change is taking hold – and could/should encourage many more generalist investors and funds to reconsider the gold mining stocks they have ignored for years.

• Berkshire does not invest for a quick flip. This investment says that Buffett believes gold will stay strong for years.

• US$565 million is a big number…but it’s also tiny. Berkshire bought 1.2% of Barrick but that represents only 0.1% of the Berkshire portfolio. If Buffett wanted to buy 10% of Barrick, it wouldn’t even register as a 1% holding! This matters because Berkshire is one of thousands of funds trying to invest as global economies stumble and central banks print oodles of money. If a fraction of these institutional 5 investors make the same decision Buffett made – that gold stocks set to kick out record free cash flows are a good place to put some money – there won’t be enough room in this tiny sector to absorb all the dollars. That’s what makes a real gold bull market and Buffett’s move has only helped encourage it.

On Monday, after news of Buffett’s move spread over the weekend, gold miners shone. Gold rose 1.5% but the GDX index of major gold miners was up over 8% on the day. Barrick was up almost 14%.

Generalist money makes things happen. Buffett is fuelling that charge.

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