Last week we argued Berkshire Hathaway should rationally own Bitcoin, and laid out the case as to why.
We aren’t holding our breath, however, because Warren Buffett despises Bitcoin. (According to Becky Quick of CNBC, he has called it “probably rat poison squared.”)
Buffett is also disdainful of gold and has been so for decades.
In the Berkshire Hathaway annual letter for 2011 — which was written in February 2012 — Buffett compared gold to farmland and energy assets. He explained that all the gold in the world, at early 2012 prices, would weigh about 170,000 tons, fit in a cube about 68 feet per side, and be worth roughly $9.6 trillion.
Buffett then joked you could buy all the farmland in the United States for that sum, along with 16 ExxonMobils, and still have a trillion or so left over.
Such purchases would yield a bounty of output and cash flow, Buffett argued, while gold would refuse to do anything. “You can fondle the cube, but it will not respond,” he said.
Yet earlier, at a speech in 1998, Buffett reportedly joked that gold tends to be dug up, processed, and reburied in a different hole with people paid to guard it. Alternate versions of this joke have been around for more than a century.
We always found it odd to argue that gold has no utility, and then to favor investing in makers of soft drinks and chocolate candies.
Sugary drinks and snacks have no utility either, except perhaps to dentists — and yet people like to buy them. Just as people have bought gold, and made use of gold as a kind of third-party sovereign currency alternative, for thousands of years.
At any rate, Bob Dylan was right: The times they are a changin’.
This was made clear in an eyebrow-raising way last week, when a Berkshire Hathaway SEC filing revealed a $562 million stake in Barrick Gold (symbol GOLD on the NYSE).
Barrick’s share price jumped more than 11% — adding nearly $6 billion in market cap — on the news that Berkshire Hathaway had bought.
The jump represented an instant value-add more than 10 times the size of the actual share purchase, demonstrating that investors still very much care what Berkshire is doing.
But what is really going on here, given Buffett’s longtime disdain for gold? Why would he not only buy a gold stock, after all these years, but buy one with GOLD as the ticker symbol? One possibility is the Oracle of Omaha simply changed his mind. This is rare, but it’s happened before.
At one time Buffett and Munger swore they would never own technology stocks, calling them outside their “circle of competence.” Munger even cited IBM as an example, specifically, of a technology company that looked decent, but a stock they wouldn’t buy.
Many years later, Berkshire Hathaway did in fact buy IBM. After that it bought Apple, and then bet hugely on Apple. The IBM bet didn’t work out, but the Apple bet worked fantastically.
So maybe Buffett simply changed his mind on gold, in the same manner he changed it on technology.
It is far more likely the case, though, that Berkshire’s bet on Barrick was not a Buffett move at all. Instead, it probably came from one of the two money managers who sit in Buffett’s shadow, Ted Weschler and Todd Combs.
The size of the purchase is a clue. When Weschler or Combs make a buy decision on their own, the purchase amount tends to be tiny, whereas Buffett himself swings a far bigger bat.
At $562 million, the Barrick purchase would be gigantic for most any other money manager. And yet, for Berkshire Hathaway, it is less than three-tenths of one percent of the portfolio.
Then, too, there is a case to be made for Barrick that views gold purely as a commodity, without any expression of opinion on gold as a monetary metal.
Barrick has all-in production costs below $1,000 per ounce. This means that, if one anticipates the gold price staying well above $1,000 per ounce for the next few years at least, Barrick should behave like a cash-flow machine.
Alternatively, if the gold price falls, deflationary forces might cause Barrick’s production cost to fall, too (think reduced cost inputs for energy and wages). In that case, the gold price could drop a fair bit, and Barrick would still remain a cash-flow machine.
So, all in all, Berkshire Hathaway’s surprising gold-stock investment is not as wild as it seems. The odds are low that Buffett himself has had a monetary epiphany, and now lives in fear of out-of-control inflation or runaway currency debasement.
Still, though, most investors will not read past the headline. They will say something along the lines of, “Wait, what? Berkshire Hathaway put that much in a gold stock?”
Those same investors may also notice Berkshire is either dropping or trimming some of its big bank stakes. Having sold out of Goldman Sachs entirely, Berkshire’s latest filing showed significant cutbacks to its JPMorgan and Wells Fargo holdings, plus significant trimming in a handful of other bank names. (Those moves were surely Buffett approved.)
Not just the gold price, but the copper price and silver price also, with precious metals stocks alongside, responded with bullish vigor on Monday. This is an excellent sign.
In other news, not as big a deal but still helpful to the cause, it was revealed last week that Bridgewater Associates — one of the largest and most long-term profitable hedge funds in the world — added more than $400 million worth of gold exposure, though the purchase of gold ETFs, in the second quarter.
Taken together, these moves are formidable endorsements — backed with money, rather than words — of the notion that gold’s bull market is nowhere near done, and is more likely just getting started.
We knew that anyway, but it doesn’t hurt to see Berkshire and Bridgewater, two of the most deep-pocketed entities in the world, saying the same thing with their actions.