The Real Story Behind Warren Buffett Buying Gold

At times one of the industry’s biggest detractors, Warren Buffett is seemingly finding gold alluring! Announcements of Berkshire Hathaway’s acquisition of Barrick Gold on Friday sent shares soaring in the aftermarket and acted as vindication to gold bugs the world over that the yellow metal has a shiny future.

This news has a couple discernible benefits. For one, most investors are part of the herd – categorical followers who pile in to a trade. There is no individual better to follow than the world’s most successful investor himself. And so, Buffett’s announced entry will inevitably attract a new group of investors to gold and gold stocks.

Then, there is Buffett’s long-term outlook; Berkshire rarely invests for a quick flip. This acts as an assurance, for whatever its worth, that Buffett believes the gold run is not fizzling out anytime soon.

But look beyond the obvious implications of Buffett’s new appetite for gold and there is a much bigger story at play here – one with far greater implications for us junior gold stock investors.

Berkshire Hathaway reported the purchase of 20.9M shares of Barrick Gold, a position valued at $563.5M. This is a big number on the surface. Placed in the context of Berkshire’s $500B+ market cap and stacked up against Berkshire’s better-known holdings like Apple, Coca-Cola, and Kraft Heinz, it makes the exercise of accumulating the position seemingly tough to justify.

Think about this. The $563.5M purchase of Barrick shares creates a position that represents a measly 0.1% of the Berkshire portfolio. Yet, Berkshire now owns a 1.2% stake in Barrick Gold!

Extrapolating this trend out, even if Buffett really gets going on gold and decides to buy 10% of Barrick, the position would not even register as 1% of Berkshire’s overall value! And Berkshire is just one of many thousands of institutions trying to place money and grow capital in a global economy sloshing around with trillions of investable dollars.

Let’s compare apples and oranges for a moment…

The orange is Barrick Gold. Berkshire Hathaway, just one institution, is more than ten times the size of the entire market cap of the world’s largest gold producer. The apple – Apple Inc. – Berkshire’s largest holding. Berkshire Hathaway is a quarter the size of this single technology giant.

Now, I am not trying to make the case that Barrick will grow to the size of Apple. Rather, I am pointing out the obvious discrepancy in play. When institutional investors the world over decide to start buying gold stocks, not because they are worried about inflationary pressures or FED policy, but simply because gold miners are about to throw off record free cash flow, what is going to happen to the sector?

The sector is going to explode.

Gold bugs have theorized around this moment – how an entire sector that is smaller than the market cap of one single technology company will one day explode in value as investors rush in. That moment is now here and Buffett’s entrance will mark the start of the herds move, a move that will propagate into a stampede.

For junior resource investors the returns are going to be astronomical. Since Berkshire Hathaway’s market cap trumps the entire gold mining sector, Warren Buffett cannot buy a meaningful position and hence, is at a serious disadvantage, even if he is truly keen on gold.

Us little guys on the other hand, can buy junior gold stocks. We can even purchase juniors through financings with the benefit of warrants – warrants which offer investors the very best catapult to riches in a gold move.

And that means that an investment portfolio like Palisades Goldcorp, heavily weighted in juniors, will blow Berkshire Hathaway out of the water over the next few years. 

Until next week,

Collin Kettell
Founder & Executive Chairman
Palisades Goldcorp Ltd.