Why Warren Buffett Is Finally Buying Gold

Berkshire Hathaway's bank stocks get the 'airline treatment'... Why Warren Buffett is finally buying gold... Cautiousness reigns... The bull case for gold... An important message from our 'value guy'...

'Never bet against America'...

That's what Warren Buffett said at Berkshire Hathaway's annual (and this time, virtual) shareholder meeting back in May. The pro-American, long-term stance wasn't surprising... The legendary investor has said it many times in public before.

But as we noted in the May 4 Digest, what Buffett was saying and what he was doing with his investments amid the COVID-19 pandemic and corresponding economic shutdowns didn't exactly align. As we wrote at the time...

What Buffett and Berkshire have actually done with their billions since the coronavirus outbreak hit the U.S. doesn't necessarily show they're betting against America... but they're surely not confident in things right now.

Buffett has sold every single share, totaling billions of dollars, that Berkshire owned in major airlines American Airlines (AAL), Southwest Airlines (LUV), United Airlines (UAL), and Delta Air Lines (DAL).

And when Berkshire's stock crashed along with everything else in March, the company repurchased only $1.7 billion of its own shares, a little more than 1% of the total cash the company has on hand.

At the time, Berkshire had $137 billion of cash on hand, about $10 billion more than the holding company did at the start of 2020. Looking at the broader picture, that was far from the behavior of a bullish-thinking company.

Recently, we learned Buffett has now dumped his bank stocks, too...

Berkshire's recent 13F filings with the U.S. Securities and Exchange Commission ("SEC") tell the story.

In case you're not familiar, elite investors who manage at least $100 million are required to file a Form 13F with the SEC. These quarterly reports detail which stocks the investors bought and sold from one quarter to the next... as well as exactly which stocks they held at the end of the most recent quarter.

In the second quarter, Berkshire sold 26% of its stake in Wells Fargo (WFC) and dropped 62% of its holdings in JPMorgan Chase (JPM). It also reduced its investments in the Bank of New York Mellon (BK), M&T Bank (MTB), and PNC Financial Services (PNC)... and completely exited its $300 million stake in Goldman Sachs (GS).

That's a lot of selling involving banking stocks... though Buffett did add to Berkshire's Bank of America (BAC) position. Berkshire now owns 12% of the company, according to the Wall Street Journal and data-research firm FactSet.

So this is not the total "airline treatment" from one of the most famous investors in history, but it's close.

Frankly, Buffett's moves don't surprise us...

As we pointed out in the July 20 Digest, the big banks were one of the market's sectors that had not yet recovered from March's COVID-19 panic bottom like a lot of other sectors...

As we put it, if you were looking for a macro "debt" trade, being bearish banks and bullish capital-efficient companies like Software as a Service ("SaaS") providers or cloud vendors looked like a pretty good bet. As we wrote in that Digest...

These companies are allowing business to happen and people to connect... without exposing anyone to virus-filled micro-droplets that can linger in the air.

And not only are these "future of work" companies, but they're also incredibly capital-efficient, which Digest readers know we love. Their products can be used at scale, with largely fixed costs...

It's not like they're spending money to build a new car to turn a profit, or make a loan and hope the interest and principal is returned like the banks.

Like our colleague Bill McGilton detailed in July about the airlines, the worst could still be coming for the banks... They're dealing directly with folks and businesses that are bearing the biggest brunt of the pandemic, the related shutdowns, and the significant job losses.

The five largest lenders in the U.S. – JPMorgan, Wells Fargo, Bank of America, Citigroup (C), and U.S. Bancorp (USB) – say the financial stress caused by the COVID-19 pandemic could cause borrowers to default on a total of $104 billion in debt.

And for people who are looking to do something safe with their money to grow their wealth, traditional savings vehicles are yielding next to no interest today.

Buffett sees these numbers, too... That's a big reason why Berkshire's holdings in Wells Fargo and JPMorgan fell by more than $3 billion in value each in the second quarter.

But here's the real kicker from the filings – Berkshire bought gold...

Specifically, a gold stock.

Let the record show that Berkshire, as of June 30, owned 20.9 million shares of gold major Barrick Gold (GOLD). The stock rose about 12% today to a little more than $30 per share. At that price, Berkshire's position is valued at around $627 million.

Relatively speaking, that's not a lot...The position accounts for less than 1% of Berkshire's entire stock portfolio. But it's significant enough to note today because...

There's a good chance that anyone who has followed the "Oracle of Omaha" and his business partner Charlie Munger over the years is shocked by the fact that Berkshire owns gold stocks at all.

Buffett, who turns 90 this month, and Munger, 96, have religiously dismissed gold's place in the portfolios of ardent value investors like them... even as a small part. Buffett has said gold is "incapable of producing anything."

At Berkshire's 2012 annual meeting, Buffett offered up the ultimate bet... He said he would bet his life on the holding company outperforming gold over a 50-year period.

That same day in Nebraska, Munger said they "have never had the slightest interest in owning gold," and that he would never want to work with "gold bugs."

And back at the 2005 annual meeting, Buffett said he wouldn't even seriously consider gold as a "store of value," either... which, as regular Digest readers know, is typically what fearful investors consider the strength of the precious metal. As Buffett said in 2005...

I would say that gold would be way down on my list as a store of value. I mean, I would prefer owning a hundred acres of land near here in Nebraska, or an apartment house, or an index fund.

It's unclear who exactly within Berkshire's decision-making suite placed the "buy" order on Barrick. But our friend, Empire Financial Research founder and Buffett expert Whitney Tilson, has an educated guess...

Before the pandemic turned this year's Berkshire meeting into a fully virtual event, Whitney had attended each of the company's past 22 annual meetings in person. And he literally wrote a chapter in the book, Poor Charlie's Almanack: The Wit and Wisdom of Charles T. Munger.

As Whitney wrote in his free daily e-letter today, given the small allocation, he believes that one of Berkshire's other investment managers, Todd Combs or Ted Weschler, is responsible for buying the gold shares.

Still, no matter whose idea it was to place the order, Whitney is hesitant to read too much into Berkshire's purchase. He doesn't believe it means that Buffett is "super-bearish" on things today, but...

I do think this reflects Buffett's cautiousness about the current state – and future prospects – of the U.S. economy.

We've laid out the case for gold in times like these before...

As the Federal Reserve has cleared the path for $6 trillion in new money to enter our economy, held interest rates near zero, and watched as inflation fears grew, scarce "hard assets" – like gold and other precious metals, or real estate – have found buyers interested in relative value to the U.S. dollar.

Many of our editors have long considered gold to be a "chaos hedge" that would thrive in times just like these. Notably, Gold Stock Analyst editor John Doody went on record back in April to say that gold will reach $3,000 per ounce... well eclipsing previous all-time highs.

Since then, the price of gold has indeed churned higher. It crossed $2,000 earlier this month, setting a new all-time high. In his latest issue, published last Monday, John reiterated his thesis...

Gold is in all new territory with no overhead resistance levels from prior highs. Investors should expect gold to reach $3,000 an ounce in the next several years and invest accordingly...

Future historians may say the current gold bull market began after President Donald Trump was elected and before he took office on January 20, 2017. The metal bottomed at $1,128 an ounce on December 22, 2016 and began its climb.

But we see current Fed Chair Jerome Powell's later actions as truly igniting gold's most recent rocket-stage higher...

Perhaps most important, John believes – and has preached for decades – that well-run gold-mining companies will make exponentially more money as the price of a single ounce of gold dug out of the ground goes up.

In a 'fake money' world, this is real economics...

So while, yes, the Oracle of Omaha is right in saying gold cannot produce anything on its own because it's a physical asset, even Buffett has to admit that gold – given the alternatives in our upside-down economy – can produce a meaningful return today.

One of our longtime indicators said as much...

As we wrote last November, while noting the growing amount of negative-yielding debt – bonds that cost investors money simply to hold them – worldwide, gold looked like an attractive option for your money...

So what should you do if you're concerned about the impact of rock-bottom or negative rates on your money?

Longtime Digest readers know we've tracked the charts of negative-yielding debt and gold over the years...

Excuse us while we go look for some gold investments now.

Both lines have tracked higher since we wrote those words roughly nine months ago... The pile of negative-yielding debt worldwide equaled nearly $14 trillion in July. And after pulling back slightly to start this month, the price of gold is around $1,980 today.

All of this was on our mind earlier this year...

We heard John lay out the case for gold way back in the pre-shutdown days of early March at our annual Spring Editors' Conference in Florida... and then listened to Buffett's lukewarm endorsement of the U.S. economy and markets at Berkshire's shareholder meeting two months later.

Among other things, Buffett was openly considering what "extreme consequences" would come from low and negative interest rates. As he said during the May shareholder meeting...

I'd love to be Secretary of the Treasury if I knew I could keep raising money at negative interest rates. That makes life pretty simple.

We're doing things that we really don't know the ultimate outcome to. I think in general, they're the right thing, but I don't think they're without consequences, and I think they could be of extreme consequences if pushed far enough.

So we made this observation in the May 4 Digest...

The Oracle of Omaha didn't specifically say "gold" at any point in his thoughts during Berkshire's annual meeting, at least not directly. He spoke instead about U.S. Treasurys and cash, which are also good bear market investments.

But funny enough, Buffett did indirectly talk about this idea, even if he didn't realize it. When he made an analogy about Berkshire's defensive positioning right now, he said...

Our position will be to stay a Fort Knox.

Unbelievable... the home of the largest gold reserves in the country. Why not just go for the real thing?

Now, he has.

So today, we say this somewhat in jest... Maybe bitcoin – which Buffett famously called "rat poison" on national TV – will be disclosed in Berkshire's third-quarter filings.

Thankfully, we know a 'value guy' who has been way ahead of Berkshire on gold...

When it comes to value investments here at Stansberry Research, we turn to Extreme Value editor Dan Ferris.

We can tell you that for years, Dan has recommended owning gold and gold stocks to investors who want to grow and protect their wealth. He made a pair of gold recommendations in March and April that are up an average of 17% since he told subscribers to buy them.

Of course, you can read Dan's words of wisdom each week here in the Digest. And along with Extreme Value head research analyst Mike Barrett, Dan is always on the prowl for "hidden gems" in the market and sharing top-notch actionable advice with subscribers.

Dan and Mike's research, by nature, also tends to uncover trends that many other investors are missing, too... Among other things, Mike wrote what's likely our most prescient issue of the year back on January 2. You might recall the headline, "Three Warning Signs of the Next Great Depression."

Today, Dan is sharing another important message...

In short, he sees a massive opportunity in the markets that 99% of people will miss... And he wants to make sure you aren't one of them.

Dan learned this lesson long ago – after a critical mistake left him broke, with just $268 to his name back in the early days of his investing career. Today, Dan believes this same lesson could now lead investors to a 1,550% gain in one of the best businesses on Earth.

Click here right now to find out more in Dan's free presentation. He has never talked publicly about how he started out as an investor, so that's worth your time alone.

How to Find a Worthy Silver Investment

In this recent video with our colleague Jessica Stone, Garrett Goggin of Silver Stock Analyst shares the top three things that investors need to know when investing in silver mines...

Click here to watch this video right now. For more free video content, subscribe to our Stansberry Research YouTube channel... and follow us on Facebook, Instagram, and Twitter.

New 52-week highs (as of 8/14/20): Booz Allen Hamilton (BAH), Calibre Mining (CXB.TO), Dollar General (DG), GrowGeneration (GRWG), Green Thumb Industries (GTBIF), Innovative Industrial Properties (IIPR), Scotts Miracle-Gro (SMG), Trulieve Cannabis (TCNNF), and Victoria Gold (VGCX.TO/VITFF).

In today's mailbag, feedback on the sports industry, which we wrote about last week in the Digest. Do you have a question or comment? As always, e-mail us at feedback@stansberryresearch.com.

"I recognize ice hockey is not a 'mission critical' sport in the United States, however, the National Hockey League stands (for now) as a major sports league that is operating despite the Covid epidemic.

"In fact, the playoffs for the Stanley Cup are on! The team players, coaches and officials have been in isolation for weeks within two big bubbles in Edmonton and Toronto. Constant testing, no fans, no going home/out, group quarantine on a massive scale. It's difficult to foresee how sustainable it will be in the long term, but a major league sport is operating in North America." – Paid-up subscriber Mark L.

Corey McLaughlin comment: You're correct... The NHL hasn't had any positive cases over the past four weeks, since players arrived at the league's two "bubble" locations. And people at home are watching the games, too. TV ratings have been 39% higher than average.

All the best,

Corey McLaughlin
Baltimore, Maryland
August 17, 2020