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Berkshire Hathaway’s Barrick buy sends false Warren Buffett signal

David Whitehouse
By David Whitehouse
Business Editor of

Posted on Tuesday, 18 August 2020 16:16

Berkshire Hathaway Chairman Warren Buffett at his company's annual shareholder meeting in Omaha, Nebraska, U.S., May 4, 2019. REUTERS/Scott Morgan

Investors hoping to make a quick killing by following Warren Buffett’s Berkshire Hathaway and buying shares in Barrick Gold are likely to be disappointed.

As well as being Africa’s largest gold miner, Barrick has gold and copper mining operations and projects in the Americas, Papua New Guinea and Saudi Arabia. Second-quarter profit announced in August more than doubled on the back of gold’s powerful rally this year.

Shares in the mining company jumped 12% on Monday after Berkshire Hathaway disclosed that it had taken a stake.

So, right off, anyone buying Barrick now is paying a premium because of the market impact.

The news came as a surprise as Buffett has a history of arguing against gold as an investment.

He started investing in stocks in 1942. In his 2018 shareholder letter, he compared the returns from investing in gold and US stocks. The value of a gold investment made in 1942, he found, would have been less than 1% of the value achieved by a simple investment in the US stock market.

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He put it another way in a speech at Harvard in 1998. 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.”

  • Berkshire’s stake in Barrick Gold is worth about $564mn.
  • The holding has to be compared against Berkshire’s market value of about $500b.
  • Most of the investments that Warren Buffett makes himself are in the billions of dollars.
  • An investment as small as this is unlikely to be his personal decision, but rather the work of one of the managers who run his funds.

Active and Passive Management

Buffett or no Buffett, the Berkshire seal of approval is a potent one. And the fact that someone else made the investment does not make it a bad one. Gold’s momentum could continue and pull Barrick higher with it.

READ MORE South Africa: Why Gold has not risen more on Coronavirus

Still, the purchase should be seen in the context of Buffett’s scepticism that his own record of outperforming the market through superior stock selection can be sustained after his death.

  • The means at Buffett’s disposal to employ the best fund managers to look after his personal estate are effectively unlimited.
  • But in his 2014 shareholder letter, Buffett said that the trustee for his estate would be asked to invest 90% of the money in a low-cost fund tracking the S&P500 stock index, and the rest in short-term government bonds.
  • In other words, please don’t try to actively manage my money after I am gone.

And above all, don’t put it into gold.

Asked in 2009 where he thought gold would be in five years’ time, Buffet said he had no idea. “The one thing I can tell you is it won’t do anything between now and then except look at you,” he said.

Businesses, by contrast, would be making profits and growing over those five years, he added.

READ MORE: Ghana now Africa’s largest gold producer, but reforms await

Buffett himself has no track record of investing in mining stocks, which simply add operational risk to the price risk of the metal itself. Berkshire Hathaway may be able to claw back a small part of its heavy losses in airline stocks since the start of the COVID-19 pandemic by betting on Barrick.

But the stake should not be mistaken for a long-term strategic investment.

Bottom Line: Do your own homework on Barrick Gold rather than following a marquee name, or consider buying an index fund instead.