Warren Buffet buys into “Gold mining” stocks & not gold. The biggest buzz last week was the release of Berkshire Hatchway’s 13F – a quarterly SEC
filing which lets the world know what is the “Oracle of Omaha” buying and selling. While the media went amok with news that Warren Buffet has finally bought into Gold. Berkshire Hathway has actually bought into Barrons – a gold mining stock.
Buffet has been on a selling spree recently, dumping positions in Goldman Sachs and Occidental and significantly trimming his position in JP Morgan, Wells Fargo and PNC. Buffet’s lack of enthusiasm for the yellow metal is very well known; Buffet considers gold to be an unproductive asset that does not yield anything. Being a physical commodity, an ounce of Gold remains the same over a period – It is actually the weakening of the dollar that gives it value. An ounce of Gold that costs 100$ in the 1970s still weighs and looks the same, its value has only changed because of the depreciation of the Dollar.
Historically, over a longer period – Gold has always underperformed equities. Over the shorter term though, Gold has outperformed periodically. If we go back the last 100 years, stocks simply blow gold away.
Why has Gold Mining as a sector received a lot of attention globally recently?
There is a big difference between Physical Gold and the Paper Gold that is traded on the exchanges, with the latter being 10 times more in Volume.
In Reality, the amount of physical gold that has been mined has grown only by 1% every year over the last 10 years or so – which is not the case for paper gold as multiple ETFs continue to spring up around the world.
Gold Mining is an expensive business and has huge OPEX costs and is notoriously cyclical. The revenue side of the business hugely depends on the trend in gold prices. Since Gold prices have been on an upward spiral lately, there has been a massive margin expansion For Gold Mining companies. Coupled with low inflation on commodities, Many Gold mining companies have been reporting bumper quarters. However, a huge valuation gap was noticed between the prices of Gold and Gold mining companies in the last few
months – making the sector a Good play in the current markets.
Why Barrick Gold?
- Buffet likes to typically invest in companies that are High quality, have a moat, have typically low OPEX and high margins. Barrick fits the bill perfectly
- Barrick Gold has low OPEX and has seen a steady margin expansion over the last few quarters.
- Has a very health Free Cash Flow profile
- Is almost net Debt Free
- Pays a Healthy Dividend Yield.
- Management Quality is one of the best.
By Buying Barricks Gold, Mr. Buffet has stayed true to his principles of only buying productive assets that seem to be undervalued – but the recent selling by Berkshire Hathway across the board also seems to caution the market about rough times ahead.