Going for Gold: Warren Buffett and Barrick Gold

Going for Gold: Warren Buffett and Barrick Gold

Dear Reader,

‘Gold’ is the word on everyone’s lips right now — whether you’re Warren Buffett or a Turkish wife, says Jim Rickards in today’s DR. As usual, it seems everyday investors know something the central bankers don’t.

Read on to find out more…

Until next time,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia

Buffett Dumps the Paper Money Factories and Goes for Gold

Warren Buffett is not a big believer in diversification. He likes to make big concentrated bets in just a few companies. Over the years, his favourites list has included Coca-Cola, IBM, Goldman Sachs, the Burlington Northern Railroad, and some of the big banks.

They’re not all winners. Buffett was disappointed in IBM and got out a few years ago. On the other hand, some like Coca-Cola have been huge winners over long periods of time.

Like all good investors, Buffett lets his profits run and cuts his losses short. He just executed one of his biggest portfolio shake-ups along these lines.

Buffett and Barrick Gold

As reported in this article, Buffett dumped much of his stake in JPMorgan and Wells Fargo bank and made a huge $563 million bet on Barrick Gold. There are fundamental reasons for this, including the fact that bank earnings are likely to suffer both because of a flat yield curve (banks can’t make profits on a spread when there is no spread) and accumulating loan losses from the COVID-19 economic collapse and coming defaults.

Of course, Barrick Gold is a beneficiary of rising gold prices, which have enabled it to pay off most of its debt, so it’s well positioned to go on an acquisition binge buying smaller miners with proven reserves. But there’s another way to think about this trade with more profound implications for investors.

Buffett is signalling lost confidence in the US dollar

Banks create money by making loans and adding the loan proceeds to borrower accounts through a few accounting entries. Gold miners create money by digging up gold, processing it, and selling it to refiners. The banks create paper money. The gold miners create hard money.

Buffett is signalling a loss of confidence in the US dollar. He’s getting out of the paper money business and into the hard money business. Economists call this a ‘liquidity preference’. I call it a sign of the times. If Buffett is moving into hard money in the form of gold, maybe you should too.

The Federal Reserve may not understand gold, but Turkish wives do…

We’ve all been mesmerised by action in the price of gold lately. In the past few months, gold rallied over $200 per ounce and traded solidly about the $2,000 per ounce level, hitting a new all-time high and taking out the previous high from August 2011.

Of course, gold is volatile and has its down days alongside the up days, but the trend to much higher prices is firmly in place. Everyday investors understand this price action, but the Federal Reserve does not.

Gold reserve requirements on the US money supply were ended in 1968 and the ability of foreign trading partners to convert US dollars to gold at a fixed price was ended in 1971. Ever since then, central bankers in general and the Fed in particular have banished gold from the conversation and insisted that if you think gold has a place in the monetary system, you are a ‘gold bug’, a moron, or worse.

Gold is persistent

But gold keeps showing up as an uninvited guest at the dinner table to haunt the central bankers. Economists may have abandoned gold, but investors have not.

This article reports on a frenzy of gold buying in Turkey. The reasons for this are clear. Turkey’s central bank has lost its independence, and the president of Turkey is demanding low interest rates and more money printing, which in turn is leading to runaway inflation. Gold is the obvious hedge.

Spouses are sending their other halves to the market with their lira and strict orders to bring home the gold. Similar scenes are playing out in China, South Korea, Germany, and elsewhere around the world.

Once again, this proves that everyday investors are the first to act at important economic turning points and central bankers are the last to know. It’s not too late to add to your gold allocation before new restrictions on gold buying or gold ownership are imposed.

All the best,

Jim Rickards Signature

Jim Rickards,
Strategist, The Daily Reckoning Australia

PS: Free report reveals why Australia is set to become the next ‘gold epicentre’ — which could result in a HUGE spike in Aussie gold stock prices. Click here to learn more.