Warren Buffett Buys GOLD?

Well, it's that time again. The 13Fs are out. Uh, so we as the little investors get to have a look at what the big money managers of the world are buying and selling. And definitely the most watched 13F filing is definitely that of Mr. Warren Buffett.

Uh, his 13F filing this round was quite surprising. I definitely did a double take because it said that Berkshire Hathaway was buying gold. To me, this was very surprising because Warren Buffett has gone on the record multiple times saying how he doesn't like the idea of investing in gold, quite simply because it's a non-productive asset. If you buy an ounce of gold today and you hold it a hundred years, you can go to it every day, and you can coo to it, and you can caress it, and you can fondle it. And, and, and 100 years from now, you'll have one ounce of gold, and it won't have done anything for you in between.

If you buy a hundred acres of farmland, it will produce for you every year. You can use that money to buy more farmland; you can do all kinds of things. But for a hundred years, it'll produce things for you, and you still have 100 acres of farmland at the end of the 100 years. You could buy the Dow Jones Industrial Average for 66 at the start of 1900. Gold was then 20; at the end, it was 11,400. But you'd all gotten dividends for 100 years. So a productive asset of any kind, a decent productive asset, is going to kill a non-productive asset over time.

Now, and this has long been Warren Buffett's viewpoint, and the reason why he stays well away from investing his money in gold. When you buy gold, it doesn't do anything. You just sit there; you can watch it, it looks pretty, and then eventually you hope down the track to sell it to someone who wants to buy it from you for more than what you originally paid for it. It's not like a business where you can buy a part ownership and while you hold the shares of that business, the company still makes money, right? It produces cash flow. So it's a completely different way of thinking about investing.

So, yeah, I was certainly very, very surprised when I flicked open Berkshire's 13F, and there you go: Warren Buffett is buying gold. So it seems as though his opinion around gold is changing a little bit. Now, one thing to clarify is that he didn't actually buy just straight-up physical gold. He didn't do that. What he did is he bought a stake in a gold mining company called Barrick Gold. So Berkshire Hathaway, they bought 21 million shares of Barrick Gold, currently worth around 563 million dollars.

And it's kind of funny; this is kind of like the most Warren Buffett-y gold investment you can get because instead of just buying straight-up physical gold, he's decided to buy a business that mines and sells gold. This is actually pretty clever because if you just bought physical gold, then you, as the holder, you are just at the mercy of whatever the gold spot price currently is. However, there's another dimension if you own a gold mining company: yes, their profits and thus the share price will definitely be directly affected by whatever the price of gold is at the time.

However, there's that other dimension that you can still get a good return if the company is able to, you know, increase their operations. They're able to mine more gold and sell more gold. For example, here's a quick look at what the gold price has looked like over the last little while. Now, if you bought just straight-up physical gold, your investment, the value of your investment, would just ride the ebbs and flows of whatever this chart says.

However, in this chart here, you can see Barrick Gold's production numbers. If you take out the last couple of quarters, so if you take out the shutdown, then what you can see is that over time, this gold mining company is able to dig up more and more gold. So they've got more and more and more product to sell at whatever the price is at that time. Now, this is also reflected in their earnings.

So if you have a look at their earnings when the production was low and the gold price was also low, then the earnings were negative. However, when the production was high but the price was low, then the earnings were slightly positive. But then when the production was high and the price was high, then the earnings were great.

And when the production was down but the price was up, then the earnings were not quite as good. So instead of Buffett just buying gold and being at the mercy of that price, he buys into a business where, yes, their business will be impacted by the gold price, but they've also got the potential of mining more and more gold over time and, in this case, copper as well.

So, with that said, the next question to ask is, well, why did Warren Buffett actually do this? And I think the real reason for that is that he is quite concerned about the future outlook of the economy, and he wants to protect his downside risk in these times of uncertainty. Because traditionally—and this is very, very much Ray Dalio's view on gold—gold is a store of value that protects you against the flaws of a fiat currency.

And a fiat currency is what we currently have—it’s a government-issued currency that isn't backed by any commodity. So you can't trade in your dollars for gold anymore. And, you know, usually we don't really think about the nuts and bolts of currency too much because it doesn't really change; it doesn't really impact our lives too much. I mean, we go to work, we earn 30 bucks an hour or something, and a loaf of bread costs three dollars.

But we have to remember that all that is true because there are a certain number of dollars that exist out there. So each dollar, we understand—without even truly realizing it—we understand what the value of a dollar actually is. However, the problem with fiat currency is that the central bank has the ability to create more dollars literally out of thin air. They are just able to print brand new dollars.

And what that means? That means that dollars are more abundant, or in other words, dollars are now less scarce than what they were before they started printing money. So the value of those dollars slowly goes down if the central bank is creating more of the dollars.

Now, occasionally, this can get really out of hand. For example, this is why in a country like Zimbabwe, you can have a banknote that says on the front it's worth 100 trillion dollars. However, gold isn't like that; there's only a finite amount of gold that is here in the earth, right? We can't 3D print gold out of plastic or something; it just doesn't work, obviously.

So there's always that scarcity of gold, and that's why investors like Ray Dalio always like to keep some of their money invested in gold because they hope that that scarcity keeps the value of gold quite stable when something like a dollar, that value might change over time as a central bank prints more and more money.

I think he's making a big mistake. Yeah, gold is like cash; it's an alternative version of cash. So over the long term, it's not the best investment. Over the long term, it's, you know, a little bit better than cash. Over a long time, it is, however, on when you're having a monetary crisis, when you have a fiat monetary system and you have the need for money. Debt is a promise to deliver money.

Right, so if you look at each of those devaluations that have taken place each year—what, March 1933, President Roosevelt closes the banks and then opens them and says you can get your money, and then they broke the link with gold. And so the history over that period of time is that money can be produced; gold is somewhat limited. It's an effective, it's an alternative that should be part of everybody's portfolio but not in a big way.

And that's why a lot of investors like to flock towards gold in times of economic uncertainty, right? They're hoping that that's the store of value, right? It's a safer store of value at the current time than money, than dollars, because the central banks can influence what those dollars are actually worth. So in periods of economic uncertainty, people like to buy gold, and that's exactly what we're seeing right now.

We're seeing, you know, central banks around the world absolutely printing truckloads of money. So they're making their dollars worth a little bit less and a little bit less. So a lot of investors are like, "Well, no, I'm just going to buy gold," because hopefully that stores the value, and that is why over the past year we've seen the price of gold go up so much.

Because all of a sudden, there's now a much higher demand for gold, and when the demand goes up, the price goes up. So overall, that's kind of the thinking behind gold. And, you know, I do probably think that Warren Buffett is warming a little bit to gold.

However, I should say that he's definitely not changing his tune in a great rush. Like, this investment that he just made in this gold mining company is only worth about 500 million dollars. Now, that's a lot of money, but it's not a lot of money to Berkshire Hathaway. Remember, they've currently got 146.6 billion dollars of cash on the sidelines, right? Their portfolio is worth 202 billion dollars.

So this investment is only 0.28 of their portfolio. So I don't think that Warren Buffett is necessarily changing his opinion in a great hurry, but I probably think that one of the factors that's led to this purchase is quite simply the fact that Berkshire Hathaway currently has so much cash.

They have so much cash sitting there in the bank, and perhaps they just want a little bit of downside protection by having a little bit of gold from the potential of those dollars being worth less and less and less if the central banks of the world keep printing more and more dollars.

So anyway, guys, that is the video for today. That is Warren Buffett's big new headline investment: Warren Buffett buying into a gold mining company. I'd love to hear your opinion on this; drop that down in the comments section below. Do you think that Warren Buffett's warming to gold, or do you think this really isn't something that we should be paying much attention to?

And what are your opinions on gold? Do you hold it in your portfolio? Do you believe in that idea of the store of value, or do you stick 100% to businesses that keep producing cash flow no matter what? Anyway, I'd love to hear from you guys.

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However, that is it for today; thanks very much for watching, guys, and I'll see you all in the next video. [Music] [Music]