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Why is Berkshire Hathaway buying gold?

The Next Warren Buffett

Berkshire goldIt’s official, Warren Buffett has finally turned the page on gold.

Where once the “Oracle of Omaha” chided it as the investment that “produces nothing,” Berkshire Hathaway’s (Berkshire Hathaway Stock Quote, Chart, News NYSE:BRK.B) new position in Canadian gold and copper miner Barrick Gold (Barrick Gold Stock Quote, Chart, News TSX:ABX) seems to signal a new direction for Buffett and, potentially, a more tepid view of the equities market going forward.

So says Cathy Seifert, director at CFRA Research.

“If you look back on some of the comments that Buffett has made regarding gold or gold shares it certainly is an interesting selection and I think that also speaks to the changing of the guard at Berkshire,” said Seifert, who spoke on BNN Bloomberg on Tuesday.

Berkshire gold

“My sense is that this purchase is a hedge against some of the higher beta stocks that he has an even more significant position in, specifically Apple and then some of the bank stocks. If you look at his equity portfolio it's sort of a barbell between technology and financial shares and the Barrett purchase represents an interesting hedge, in my opinion,” Seifert said.

Barrick bounced earlier this week on news that Berkshire had taken a $562-million position in the mining company, leaving investors wondering if now’s the time to buy gold, even at it tops the $2,000 mark for the first time.

But Seifert said with such a small position in gold relative to Berkshire’s total portfolio, the move isn’t all that eventful. More important is the faith that Buffett seems to be placing in his two investment deputies Todd Combs and Ted Weschler, who have transformed Berkshire’s holdings via the company’s large stake in Apple, which has served Berkshire well in recent years.

“This is sort of a little bit of testing the water,” says Seifert. “It’ll be interesting to see if
Buffett increases his stake in this holding or buys some similar names. He’s done this before and then kept the position sort of at this weighting.”

“I think the Apple purchase was certainly representative of a change [for Berkshire], and it's worked out, so my sense is that at this point the two investment deputies probably have a longer leash than they may have had before. My sense is that Buffett is still well aware of what's going on here and implicitly or explicitly signed off on [the Barrick] transaction partly because his the deputies have done a very good job, and I think they're taking a much more proactive stance as it relates certainly to the equity portfolio,” Seifert added.

As for Berkshire’s own share price, Seifert said the stock seems fairly valued at its current levels, but while the company has some potential growth areas in its portfolio, it’s also weighed down by holdings in some secular soft spots.

“I think their insurance business is poised to do reasonably well this year. The market for insurance pricing is hardening and that's a positive, but literally every other business has got some economic-related issues,” Seifert said.

“The other thing that investors should be looking for is some of their industrials, some of the energy, rail and transportation or the industrial group within Berkshire. If we start to see an increase in economic activity, that group should do reasonably well. Berkshire has a lot of consumer discretionary consumer staples related names and the outlook there is sort of mixed,” Seifert said.

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About The Author /

Jayson is a writer, researcher and educator with a PhD in political philosophy from the University of Ottawa. His interests range from bioethics and innovations in the health sciences to governance, social justice and the history of ideas.
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