It’s fair to say that, in the past, Warren Buffett wasn’t the biggest fan of gold. “Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head,” he said in 1998.
Then, in 2009, when asked about gold’s prospects for the next five years, Buffett said: “I have no views as to where it will be, but the one thing I can tell you is it won’t do anything between now and then except look at you.” Clearly, gold was not Buffett’s favourite investment.
It seems his attitude may be changing. On Friday, his company Berkshire Hathaway said that it has just made a gold-related investment.
Buffett just made a gold investment
To be clear, Buffett hasn’t bought gold itself. He hasn’t loaded up on gold bullion bars or invested in a gold exchange-traded fund (ETF).
But what he has done is buy a large number of shares in Barrick Gold – one of the world’s largest gold mining companies. In a 13F filing detailing its US-listed investments as of 30 June, Berkshire disclosed a new 21m shareholding in Barrick, worth about $570m.
What does this tell us?
This is certainly an interesting move from Buffett. Especially when you consider that the filing also revealed he has been selling shares in some of his financial services holdings, including Wells Fargo, JP Morgan Chase, and Goldman Sachs.
We can’t be sure exactly why Buffett has bought a gold stock. However, in my view, this move suggests Buffett is concerned about the unprecedented stimulus packages that central banks have announced this year. He may also be concerned about inflation (gold can act as a hedge against inflation).
If the gold price continues to rise, Barrick Gold should do well for Buffett. This is because a rise in the gold price can have a dramatic impact on a gold miner’s profitability. If the gold price rises significantly above a company’s cost of production, the increase tends to go straight to its bottom line. That can drive the company’s share price much higher.
Looking for UK gold stocks?
If you’re interested in following Buffett’s lead and buying a gold stock, you’ve plenty of options as a UK investor. There are many gold stocks on the London Stock Exchange.
I’ll point out, however, that Buffett’s choice, Barrick Gold, is a giant. It has a market-cap of nearly $50bn and generated revenues of $9.7bn last year. In other words, Buffett isn’t messing around with a tiny, speculative gold miner. He’s made a small investment (for him) in a large-cap, dividend-paying gold stock.
The most similar stock in the UK is probably FTSE 100 company Polymetal International. It’s a top-10 global gold producer with a market capitalisation of £9.4bn.
Just remember though, gold mining is a complex business. There are many things that can go wrong. This means gold stocks don’t always rise when the gold price is climbing.
If you’re thinking about investing in UK gold stocks, my advice is to spread your capital over a number of different stocks to minimise stock-specific risk.
