SEMI-MONTHLY FISCAL/MONETARY UPDATE – WARREN BUFFET’S BERKSHIRE HATHAWAY ADDS BARRICK GOLD (GOLD) TO PORTFOLIO

The big news, after the market close last Friday evening was that Berkshire Hathaway Inc., in the quarter ended 6/30, added $565M of Barrick Gold Corp. (GOLD) to Berkshire’s portfolio. This is a very positive development, not only as a reversal of Buffet’s long held disdain for the “barbaric metal”, but as an endorsement for the ownership of gold mining equities. Buffet has been quoted many times as saying that gold “just sits there”, no dividend, no interest, no growth. With interest rates virtually at zero, gold’s lack of dividend or interest is no longer a drawback. The lack of growth can now be overcome by ownership of a well run mining company that is increasing production and will benefit, in a leveraged way, from an increasing price of their end product. This rationale leads to ownership of Barrick Gold (GOLD) and lots of other possibilities, all of which we continue to own.

EXPECT A DEBATE (got to fill the 24 hour news cycle)

On one hand: $565 Million is a rounding error for Berkshire’s $150B portfolio, far from a major purchase. Barrick is just a gold miner (not gold itself) and the purchase decision was possibly made by one of today’s day to day active portfolio managers at Berkshire, not Buffet himself.

On the other hand: $565M was likely not the end of the buying. It is six or seven weeks since the end of June, the portfolio managers know that Berkshire’s purchase will trigger a great deal of interest not only in GOLD but in the entire gold mining asset class. It is therefore highly likely that more Barrick, and perhaps other mining companies have been bought by now. It is possible also, that Berkshire’s further (perhaps even more substantial) buying contributed to the strong performance since June 30th of the gold mining stocks.  Furthermore, while Buffet himself might not have initiated the move toward gold mining, he was no doubt well aware of the decision and is prepared to defend it.

Parenthetically, it is worth noting that: While Berkshire has purchased a gold mining stock for the first time, sold were billions of dollars worth of JP Morgan Chase, Wells Fargo and Goldman Sachs. Seems like a parallel path to the “money management” activities of worldwide Central Banks, who have continued to buy gold bullion while they reduce (as a percentage of reserves) their holdings of US Treasuries.

THE PSYCHOLOGY OF OWNING GOLD RELATED STOCKS

We believe Berkshire’s purchase could provide a psychological inflection point. Though gold and the gold miners have performed well for the last eighteen months, and over the long term,  a money manager puts his professional life at risk (and possibly his marriage as well) by owning a controversial gold related security. An institutional money manager can buy any amount of Microsoft or Apple or even Tesla, and his stakeholders won’t be critical if it doesn’t work, especially since so many competing money managers will be suffering the same fate. On the other hand, everybody has an opinion about gold, well informed or not, so a mistake in this area could be fatal.

In essence, Buffet now provides “cover”.

OUR ARGUMENT: SPEND THREE MINUTES WITH ME, ON YOUTUBE, YOUNGER,  AND A LITTLE EARLY, IN 2012

https://www.youtube.com/watch?v=ah7Y2rHuhCs

THE UPSIDE

The “cover” that Berkshire’s purchase provides has the potential of unleashing the upside in the gold related asset class, so let’s look at the upside.

The chart just below shows gold bullion as a percent of US Financial Assets. The chart goes only to 2014, and while it is true that gold has come back to over $1900/oz., up about 60%, the other asset classes are up about the same amount, so the relationship shown still exists. With gold bullion about 4% of assets versus a previous high around 16% there is obviously a great deal of catching up to do.

Compound the above chart with that just below which shows how the gold mining stocks have very substantially lagged the price of gold.  As you can see, the miners strongly correlated with bullion until late 2012. It would now take a triple to catch up.

SUMMARY

All the reasons that gold bullion has maintained its purchasing power for 3,000 years, for 200 years, for 50 years, for 20 years, all but between 2012 and now, are very much in place. John Maynard Keynes is quoted as saying: “When the facts change, I change my views. What do you do, sir?” The facts are not only the same as eight years ago, but substantially magnified. Warren Buffet, and his portfolio managers, do not make a lot of long term mistakes, and we join them in the view that we are much closer to the beginning of a new bull market in gold related assets than the end.

Roger Lipton