Why Warren Buffet invested in gold

(Forbes) – In its latest Form 13F filing, Berkshire Hathaway BRK.B +0.8% had a few surprises. Form 13F must be filed with the Securities and Exchange Commission quarterly by institutional investment managers with at least $100 million in assets under management. It lists the manager’s equity positions (although not shorts). Berkshire’s filing surprised markets for two reasons.

First, Berkshire exited or trimmed its position in several banks. Second, it added a position in gold mining company, Barrick Gold Corp.

Well, the internet went wild. Here are just a few of the headlines:

Golden touch: Is Warren Buffett betting against America?
Did Warren Buffett just bet against the U.S. economy? His latest investment raises some questions

Warren Buffett undergoes a conversion on gold — should you follow him?
Berkshire Makes a Bet on Gold Market That Buffett Once Mocked
Warren Buffett traded Goldman Sachs GS -1.2% for gold in Berkshire Hathaway’s newly revealed portfolio

The Twitterverse went just as crazy:

So are the headlines and tweets correct? Did Warren Buffett, at the age of 90, change his life-long investment strategy and short the United States? Don’t bet on it. Here’s why.

As you can see, Berkshire closed its position in Goldman Sachs. It also trimmed its positions in JPMorgan Chase JPM +0.4% and Wells Fargo WFC +0.4%. But it added to its holdings in Back of America Corporation. Now BAC is the company’s second largest holding behind Apple AAPL -0.2%. It’s silly, however, to suggest that Berkshire has dumped banks.

The value of its bank stocks exceeds $40 billion. In addition, Berkshire continues to hold other stocks in the financial sector. It has major stakes in American Express, AXP +1%Visa and MasterCard MA +2.8%. In fact, Amex is Berkshire’s fourth largest holding valued at over $15 billion.

Barrick Gold
So let’s to the investment in Barrick Gold. The first thing to note is that we have no idea if Warren Buffett made this investment. He has turned a large part of the portfolio over to two investment managers, Ted Weschler and Todd Combs. While he sometimes reveals whether he was behind a trade, he hasn’t revealed that regarding the Barrick Gold investment, at least that I’ve seen.

Second, an investment in Barrick Gold is an investment in a mining company, not gold. Some may respond with, “six to one, half a dozen to another.” I say lightning and lightning bugs. They may sound similar, but they ain’t.

Barrick Gold has several things that gold itself does not, including:

A balance sheet
An income statement
Cash
Dividends
Assets

In addition, it mines more than gold. It also mines copper. It’s certainly true that the price of gold and copper affects its profitability. But that’s true of any business tied to a commodity. Warren Buffett has in the past invested in oil companies affected by the price of oil and Deere & Co. DE 0.0%, which is affected by the price of crops. But that’s a far cry from investing directly in commodities.

Third, Berkshire’s investment in Barrick Gold represents a tiny fraction of the company’s market capitalization and even its stock portfolio. Here are some figures (rounded) to put the investment into some context:

In other words, Berkshire threw some pocket change into a mining company.

Warren Buffett Hasn’t Changed His Investment Philosophy
Mr. Buffett is not a fan of gold as an investment. Here are a few of his comments about the precious metal:

“[Gold] gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility.”

Referring to gold, “it’s a lot better to have a goose that keeps laying eggs than a goose that just sits there and eats insurance and storage and a few things like that.”

“You could take all the gold that’s ever been mined, and it would fill a cube 67 feet in each direction. For what it’s worth at current gold prices, you could buy — not some — all of the farmland in the United States. Plus, you could buy 10 Exxon Mobils (XOM), plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?”

What’s interesting about these quotes is that they don’t apply to Barrick Gold. Unlike gold, Barrick Gold “keeps laying eggs” in the form of profits and dividends. It doesn’t bury the gold in the ground, it sells it to others who bury it in the ground.

And Berkshire Hathaway is happy to collect the dividends from other’s foolishness.

Written by Rob Berger:
Rob is the Deputy Editor of Forbes Money Advisor, host of the Financial Freedom Show.

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