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Does Warren Buffett Suddenly Like Gold?

Gold recently surpassed $2,000 an ounce and the financial press is making a big deal out of Buffett’s new position in gold miner Barrick Gold. The narrative is that Buffett, long a critic of gold, has suddenly found religion and now loves gold. Could this really be the case?

Probably not. Buffett took a position in a gold miner, not gold itself. Gold miners sell gold; they don’t hoard it. If one expects demand for gold to stay elevated (or go higher), then selling gold is a great business. But being in the gold-selling business is very different than buying gold and owning it at $2,000 an ounce. With gold trading at record prices, it makes sense to get and sell more of it—assuming you can acquire gold for less than you can sell it. We know Barrick Gold’s cost of acquisition is less than $2,000 an ounce or else it wouldn’t be in the gold-selling business. Subsequently, they’re well positioned to profit handsomely from the sale of gold. And Mr. Buffett likes profits; subsequently, his new stake in Barrick Gold makes a lot of sense.

One final point. While I’ve long admired Buffett’s value-centric investment philosophy, we should be careful not to ascribe god-like status to any investor. Like most value investors, Buffett’s Berkshire Hathaway underperformed the S&P 500 over the past 10 years. I don’t mean to take away from the stellar returns he earned in the 20th century; he’s done exceptionally well for his shareholders over his long, storied career. But the new millennium, especially the last decade, has been less kind to value investors of all stripes, including Mr. Buffett. So I would urge caution; while the media is quick to worship stock gurus, investors would be well-advised to respect the separation between church and portfolio.

 

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