Warren Buffett, hater of pet rocks, buys his first gold mine

Legendary investor Warren Buffett has always displayed contempt for gold as an investment. So why has he bought a gold mine? John Stepek looks at what we can learn from his purchase.

Warren Buffett © JOHANNES EISELE/AFP via Getty Images
Warren Buffett: no slave to ideology
(Image credit: © JOHANNES EISELE/AFP via Getty Images)

If there’s one thing that everyone knows about Warren Buffett, it’s that he's not a fan of gold.

The man commonly described as the world’s greatest investor (unless you’re a member of the “Robinhood” generation, who are yet to be taught the value of fundamentals by Mr Market in his inimitably brutal manner – don’t worry kids, it’s coming), has frequently pointed out that gold, an inert metal, is no match for solid, honest, productive companies made in the good ole US of A.

Gold, he once said, “gets dug out of the ground in Africa, or some place. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

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So it’s intriguing to see that the world’s most famous hater of the yellow metal has just bought a gold mine.

Gold might be useless, but right now Buffett prefers it to banks

Around about this time, 49 years ago, Richard Nixon took America off the gold standard. (It was on 15 August, to be exact).

There’s a lot to the story, but to keep it simple, Nixon needed money to pay for the ongoing disaster in Vietnam, and the gold standard was crimping his ability to print money to fund it. So he simply stopped foreign governments from swapping their dollars for gold. And that was that.

Gold was no longer part of the monetary system. The gold standard, which economist John Maynard Keynes once described as a “barbarous relic”, was at an end (I mean, bits and pieces hung around for a bit, but let's keep this simple).

Gold has maintained an informal role as a monetary metal (why do you think central banks still own so much of the stuff?) but it has no formal role in the financial system. And that leads many to ask: what’s the point of it?

People who invest in it are frequently seen as a little flakey and conspiratorial. The main complaint about gold – mentioned regularly by Warren Buffett – is that it doesn’t do anything. There’s not a lot of it about, but that’s OK because it doesn’t have many industrial uses and there’s only so much jewellery demand.

It doesn’t pay any yield. In fact it costs you to own it. So why own gold when you could own Coca-Cola, say? Or another superbly successful company that can compound over time? Why bet on a “pet rock” when you can bet on American ingenuity?

That’s the Buffett line, and it’s regularly parroted by finance journos and investors who simply can’t wrap their heads around the idea of a world where preserving, rather than growing your wealth, might become a necessity.

Anyway, so this relentless stream of contempt is why some might find it slightly amusing that, during the second quarter, according to just-released papers, Buffett’s investment vehicle, Berkshire Hathaway, took a big stake (1.2%) in the world’s second-biggest gold miner, Barrick Gold.

It’s even funnier that he flogged off Goldman Sachs and JP Morgan in the process of doing so. Do feel free to have a wee chuckle to yourselves.

Be like Buffett: keep your ideology for speeches, not for your portfolio

The thing is, you can take the mickey out of Buffett and I can see why gold bugs might enjoy doing so. But what you can say for Buffett is that he’s not ideological. And you should aspire to be the same.

At the end of the day, Buffett has the mental flexibility to take advantage of opportunities when he spots them. For example, he’s been extremely damning about airlines in the past. But it hasn’t prevented him from owning them.

And Buffett was once a massive investor in silver. Back in 1997, he bought 111.2 million ounces of the stuff, then topped it up in early 1998 until he held about 129 million ounces. That’s a lot of silver, but all the same, it accounted for less than 2% of Berkshire's portfolio.

In his 1997 investor letter, he described it as a “non-traditional commitment” and noted that “marked to market, that position produced a pre-tax gain of $97.4m for us”.

His rationale for buying back then was based purely on silver's industrial uses. In short, he reckoned that there was too much demand and not enough supply – “inflation expectations, it should be noted, play no part in our calculation of silver’s value." He ended up selling in 2006 for a solid profit (though a lot less than he’d have got if he’d stuck with it for another five years).

His bets are not always successful – no one’s are. But even when he’s willing to say publicly “I’d never invest in that”, he’s more than happy to pull a U-turn if the conditions arise that make it look attractive.

So that’s something to cultivate.

So why has Buffett done this anyway?

Anyway, Buffett isn’t bailing out of banks entirely – he built up his stake in Bank of America. So this looks like he’s cashing out of the expensive banks in favour of cheaper ones.

And why buy a gold miner – which was his only entirely new holding? Well, whatever he thinks of gold, it’s selling for a lot of money right now. And unlike the last time gold was at this level, gold miners have had some respect for shareholder capital thrashed into them by the brutality of the recent bear market.

It doesn’t take a genius to hypothesise that a high gold price combined with a chastened gold production sector should equate to decent margins for miners. That’s before you consider the lower cost of energy on top of that.

If you haven’t already bought into the sector, then I think there’s still time to follow Buffett’s lead. My colleague Dominic wrote all about his favourite precious metals miners in the current issue of MoneyWeek, out right now. Subscribe now to get your first six issues free.

John Stepek

John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.