Why Warren Buffett now likes gold

published 20 August 2020

Warren Buffett has long ridiculed gold as a non-productive asset that is no match for the dynamism of American stocks. Yet now it seems he thinks gold is set to shine. Buffett’s Berkshire Hathaway took a $565m stake in Barrick Gold, the world’s second-biggest gold miner, in the second quarter.

Gold has rallied strongly this year, reaching new all-time dollar highs thanks to fears about inflation, dollar weakness and tumbling bond yields. Yet after peaking at $2,070 an ounce on 6 August the yellow metal tumbled by 9% over the following week. It remains up roughly 30% this year, but the pullback was a reminder that gains can quickly turn into losses in this volatile market. The gold miners are “riding high” this year, but extracting the metal is becoming more challenging, says Alistair MacDonald in The Wall Street Journal. The average cost of finding one ounce of gold has more than doubled since the decade leading up to 2009, according to figures from Minex Consulting. That said, constrained supply won’t necessarily mean higher prices: unlike oil, the metal is not consumed but is “virtually indestructible” once dug out of the ground.

More important for gold is demand, and there are reasons to be bullish, says Tom Stevenson in The Daily Telegraph. Bears point to 2011, when inflation failed to appear and growth exceeded expectations, for what can happen when gold gets carried away. A repeat of that scenario is possible. But 2020 reminds me of 1979, another year marked by turbulent politics and questions about the existing monetary paradigm. Not coincidentally, gold prices more than quadrupled. “Agonising about whether you missed” the rally at $2,000/oz “will seem ludicrous if we get a rerun of 1979’s flight to safety”.