Since the start of the pandemic, many have begun to discredit Warren Buffett.
We must immediately say that, in every extreme bull market, many value investors fail to achieve high performance such as the index, because the primary goal of the value investors is to avoid losses and therefore avoid participating in situations of generalized euphoria that can be very dangerous.
This means that the value investor aims to outperform the index during a bear market. But this time, in March, Berkshire Hathaway stock fell by 30%, equal to the collapse of the index.
The returns of Berkshire (looking at the price of the shares) are no longer what they used to be, during the 2007 annual meeting Buffett noted that: “‘No one in the world can earn 20% with big money”.
Despite the size of berkshire and despite its mistakes, Buffett is the only investor in the world who can boast a 55-year track record and a overall gain of 2,744,062%.
Precisely for this reason, at the end of each quater many are curious to peek at the Sec module (13-F) concerning the Berkshire Hathaway securities portfolio.
From 13-F it appears that Buffett (or Berkshire’s portfolio managers) dumped Goldman Sachs, drastically reduced the position in Jp Morgan, reduced the position in Wells Fargo, dumped all airline companies (DAL, LUV, UAL, AAL ). It consolidated its position in Liberty Sirius (LSXMK) by 40%, by 15% in Kroger (KR) and by 31% in Store capital (STOR).
What has caught the eye of many traders is the one and only new investment: Barrik Gold Corp (GOLD). Barrick Gold Corporation is a Canadian company, and is the second largest gold mining company in the world, headquartered in Toronto.
The words of a legendary investor remain etched in the mind and everyone remembers that Buffett was never a great lover of precious metals for investment purposes and once said: “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. Anyone watching from Mars would be scratching their head. “
Few, however, remember that Buffett bought silver both in the 1960s, and especially 3,500 tons of silver in 1997. The price of silver went from $ 50 an ounce to $ 10 an ounce after the 1980 silver bubble.
The purchase of the stake in Barrik Gold (albeit small) as of 30/06/2020 and the fact that he has not bought any shares since the March crash suggests that Buffett is worried about the current economic situation.
The position in Barrik Gold is very small compared to the Berkshire portfolio, but it could only have been the beginning, with a subsequent consolidation in the months of July and August. But having bought a mining company and not pure gold makes it necessary to consider the value of the company.
Following COVID-19, the mining industry has not undergone radical changes, which has instead happened in the air transport industry.
The company has a gold mining cost of $ 940 an ounce. Therefore, the current market price of gold gives a large margin of safety.
Revenues remained constant between 2015 and 2019 (with weaknesses in 2017 and 2018). The increase in the price of gold has had an impact both on the net profit which has undergone a significant increase compared to previous years (approximately 4 billion in 2019) and on the free cash flow which at 30/06/2020 amounts to 1,8 billion. The company has approximately 4 billion in cash and equivalents and total debts of 5 billion.
The value of the company is closely related to the trend in the price of gold and gold moves based on the sentiment of traders and investors (in the short) and in the long term based on the growth of the money supply, as well as changes of inflation-adjusted interest rates.
The unlimited quantitative easing of the Fed, which continues to print money to buy US Treasury issues, low rates and the covid situation have raised the price of gold by 25%. In our opinion, the purchase of shares in this company, given the current uncertainty of the global economy and the riskiness of the stock markets, makes sense only for hedging purposes, and only if it is believed that the price of gold rises.
Emiliano Cangu (Emiljan Cangu)
Article published on Seeking Alpha instablog: https://seekingalpha.com/instablog/51086228-emiliano-cangu/5486943-berkshire-hathaway-and-gold-mining