Pandemic effect: Investment guru Warren Buffett bets on gold

If you want to know how COVID-19 is changing the world of business and investment, pay rapt attention to what globally trusted investor Warren Buffett is up to.

Gold and precious metals miners are rallying on the news of Buffet’s recent stake in Barrick Gold (GOLD). Buffett’s firm Berkshire Hathaway spent about $563 million to buy 21 million shares in Barrick Gold.

Buffett, not a fan of gold

Historically speaking, Buffett has not been a fan of gold. He has had long positions in silver and silver derivatives, but otherwise he has often derided the precious metal. Much to the chagrin of gold investors, Buffett has been in the past the de facto champion of the anti-gold crowd. He supported the ideology that ‘investing in gold was akin to betting against the American economy’.

Buffett wrote in Berkshire’s 2011 annual shareholder letter that “if you own one ounce of gold for an eternity, you will still own one ounce at its end” and joked about a big pile of gold that “you can fondle the cube, but it will not respond.”

“What motivates most gold purchasers is their belief that the ranks of the fearful will grow. During the past decade, that belief has proved correct. Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As “bandwagon” investors join any party, they create their own truth – for a while,” Buffett had written in that newsletter to his stockholders.

2020 – Year of pandemic and panic

Come 2020 and Buffett has had a change of heart. The financial turmoil started by COVID-19 pandemic seems to have made Buffett’s Berkshire Hathaway Inc. look for alternative investment options and buying shares in Canadian mining company Barrick Gold Corp (GOLD) was a part of the alternative plan. The move brings the attention back to gold, which notched new historical highs this month, spiking above $2,000 a troy ounce for the first time in New York markets.

What surprised many was the note in Berkshire’s latest Form 13F. The form described, what was the new position in Barrick Gold (GOLD), as Buffett bought more than $ 0.5 billion worth of GOLD shares in Q2. While this long position is quite small compared to the value of Berkshire Hathways’ massive stock holdings like Apple, Bank of America, and of course the long-term stake in Coca-Cola, the addition of GOLD during the time of this pandemic holds much significance.

Why are gold prices rising?

Being an election year followed by a transition amidst the pandemic, the existing policies of the U.S. government to borrow heavily and for the Federal Reserve to print money are not likely to change in the near term. In fact, there is a consensus on this among global central bankers and it reflects in their policies across the globe. These policies are the main driver behind gold’s rise and perhaps the reason behind Warren Buffett’s change of heart. What’s actually happening in the U.S. monetary system has led to Warren Buffett searching for more diversified portfolio for protection from an inflation shock.

People in the know of things support Buffett’s change of stand. The new normal stems from irrational policies on the stimulus and deficit fronts, which includes massive borrowing and money printing by US leaders.

Unloading bank stocks

Berkshire Hathaway unloaded billions of dollars from bank stocks. Warren Buffett, the company’s chairman and CEO, had sold shares of Wells Fargo and J.P. Morgan Chase and cut back his investment in Goldman Sachs. Based on its second-quarter filing with the Securities and Exchange Commission, Reuters reported Berkshire reduced its Wells Fargo stake by 26 per cent to 237.6 million shares, lowering its stake in J.P. Morgan by 62 per cent to 22.2 million shares, and sold its remaining holdings of 1.9 million shares in Goldman and Sachs.

Bank and financials stocks have declined considerably this year even as many of US’ largest banks have set aside billions of dollars to provision for potential loan losses amid the pandemic.

What other investors have to say on gold?

Earlier this year, commodity investor Jim Rogers termed the recent run-up in stocks as a ‘bubble’ which was waiting to burst. He had similar views on bonds, which he argues had never been so expensive in the history of investment.

Jim Rogers had also warned that coronavirus will cause the ‘worst bear market in my lifetime’. “Gold and silver are your best bets,” he had said.