The world’s most famous investor, Warren Buffet, reported Aug. 13 that his largest buy last quarter was the $563 million his company Berkshire-Hathaway spent to buy 21 million shares of my favorite gold-mining company, Barrick Gold Corporation (GOLD). (Interestingly, Buffet sold 25% of his huge holdings in scandal-plagued Wells Fargo.)
The stunning news that Buffet had bought a gold-mining stock for the first time ever caused Barrick’s stock price to jump 15% on Aug. 16. That day the price of gold was up slightly less than 3%.
Traditionally, investors buy gold or gold-mining stocks to improve portfolio diversification, protect against inflation and hedge against a weaker dollar. (The dollar is down about 4% this year against a basket of foreign currencies.) One guest on CNBC earlier this month predicted we will have 3–5% inflation in 18 months. (I don’t believe it.)
Why do I think Buffet, whose Berkshire Hathaway stock has averaged 20% a year for more than 50 years even though it has trailed the S&P 500’s return for the last decade, decided to make a gold purchase for the first time?
Certainly I think his No. 1 reason, as I explained in my column here two weeks ago, is that the Fed and D.C. politicians injected $5 trillion into the economy during the second quarter — slightly more than our entire GDP from April to June! That money has provided a springboard for a U.S. stock market that rallied 51% from its low March 23 to Aug. 19. (Both the S&P 500, up 5% so far this year, and the NASDAQ, gaining 25% for 2020, reached record highs Tuesday.)
Record high stock markets and all-time-high consumer savings rates are causing ordinary investors and investment professionals to seek alternatives to traditional stocks and bonds. Given the continuing negative impact of the coronavirus many, including me, think stocks have surged too high too fast.
However, because inflation is well below 2% and the economy is so weak, interest rates are at all-time lows. Fed Chair Jerome Powell famously said at his June 10 press conference: “We’re not even thinking about thinking about raising rates.”
Incredibly low interest rates that allow Uncle Sam to pay about 0.6% to borrow money for 10 years make bonds a lousy investment. I think Buffet has the same negative outlook for bonds as I do.
Therefore, if stocks are too high and interest rates are at record lows, what is a good alternate investment choice that doesn’t correlate with either stocks or bonds. One obvious answer is precious metals — particularly gold and silver that are the most widely traded.
Buffet may have chosen Barrick for his precious metals choice because it is the largest gold-mining company in the world, valued by the market at $48 billion. It has numerous gold-mining operations in Africa and South America as well as mines in Canada, the Dominican Republic and Nevada. Barrick has a lucrative mutual-investment agreement with Chandong Gold, China’s largest gold-mining company. (It also owns four copper mines.)
Last quarter, Barrick reported earning 23 cents a share, a 44% increase from 2019’s second quarter. (It pays less than a 1% dividend). It bottomed at $10.86 March 23, before climbing to $28.98 Wednesday, a huge 165% jump. This year it’s up 62% and has averaged 32% for 5 years, but its minus 3% average for 10 years is a big disappointment.
TD Ameritrade's website gives Barrick terrific ratings. It’s new Smart Score 1–10 rankings rates Barrick as a perfect 10! Plus, three Wall Street rating firms — The Research Team, Credit Suisse and The Street — all give it their highest ranking.
For investors who prefer to own gold outright I recommend buying the sixth largest ETF, the SPDR Gold fund (GLD) that currently has $85 billion invested in it.
Gold was selling for only $1,522 an ounce when 2019 ended, that was 20% below its previous record-closing high nine years ago (September 2011) at $1,897. It closed Wednesday at $1,959, a 44% gain this year. Its new all-time $2,067 high was set Aug. 7.
This month, Goldman Sachs 12-month forecast that gold would hit $2,300 an ounce while Bank of America predicted a possible $3,000 price. Most bullish of all was the Royal Bank of Canada’s belief that there is a 40% chance that gold prices per ounce could surge to $3,060 by next year’s first quarter. (Gold’s 20th century $843 an ounce high Jan. 21, 1980 would translate to an inflation-adjusted number of about $2,800 today.)
Gold has a 12% average return for 5 years but only a 5% yearly average for 10 years. Historically, gold and silver have not been a very good long-term investment, if held for a decade or longer.
However, many precious metals experts argue that sliver is now a better investment than gold. “The ratio of the number of ounces of silver to buy one ounce of gold is historically high, implying that either gold is overpriced or silver is underpriced.” (Barron’s 8/3/2020, p, M6).
You can own silver itself by buying the popular $14 billion ETF iShares Silver Trust (SLV) that was up 27% last month and has actually doubled so far this year. Still, sliver priced at $27.40 an ounce Aug. 18 is just 57% of its all-time $49 high set in April 2011. Through July 31, SLV had only averaged 10% for five years and 3% for 10 years.
My advice is to own a silver-mining stock rather than the metal itself, although it certainly is a much higher risk. Besides Barrick, my only other precious metals’ investment is Silvercorp Metals (SVM) that plunged to only $1.50 a share March 23 before it tripled to $4.63 by June 1 and then rose another 50% during June and July. Its closing price Wednesday was $7.70, a stunning 414% gain from its March 23 price.
A micro-cap stock valued at only $175 million, SVM was rated a buy last month by two Wall Street firms, Eight Capital and Zack’s. Eight Capital raised its target share price July 20 from $7.70 to $9.25. It has a terrific 58% annual average for five years but it’s only up 2% for 10 years.
Please remember that gold- and silver-mining stocks are far more volatile than the average stock and should never be more than 10% of your portfolio. But I would argue they are appropriate alternative investments now, given a stock market up 51% in five months and record-low bond yields. Certainly when it comes to gold investing, Warren Buffet is a believer, too.
Contact Larry Hungerford at Woodard & Company at 336-998-7000 or email@example.com
Be the first to know
Get local news delivered to your inbox!