Warren Buffett’s aversion to gold has been well documented. Over the last few decades, he has steered Berkshire Hathaway Inc (NYSE: BRK.A) (NYSE: BRK.B) away from any direct or indirect investments in gold. In 2011, he explained to CNBC’s Squawk Box talk program that “gold is a way of going long on fear”.
This is what The Oracle of Omaha actually said during the talk show program:
Basically gold is a way of going long on fear, and it’s been a pretty good way of going long on fear from time to time. But you really have to hope people become more afraid in the year or two years than they are now. And if they become more afraid you make money, if they become less afraid you lose money. But the gold itself doesn’t produce anything.
Buffett then made a shocking move
In August 2020, Buffett shocked the investing world when he revealed that his mothership company, Berkshire Hathaway, purchased US$563.6 million or a 1.2% stake in a major United States gold miner Barrick Gold Corp (NYSE: GOLD). The move was even more surprising because by the time he made this purchase, the gold price had already increased by 15% since March.
His investment clearly gave a strong signal to the market that he expected gold prices to remain high over the long term, as he is not known to make flippant investments for short-term profits. Indeed, the gold price did rally after the announcement, moving as high as US$2,035/oz in late August before retreating to the current level of US$1,903/oz.
How should we interpret Buffett’s gold investment?
There are two ways we can read into Buffet’s Barrick investment. One way to look at it is that Buffett is expecting the pandemic and consequent market uncertainties to be prolonged indefinitely. This is consistent with his view that “gold is a way of going long on fear”. In this instance, his Barrick investment can then be regarded as a substitute for pure, precious metal play.
Another way to interpret his investment is that Buffett is not actually buying exposure directly into gold metals, but rather seeing fundamental value and growth prospects in Barrick as a business. This line of thought has been previously dissected by one of my Fool colleagues here.
However you look at it, one thing is for sure: precious metal is one of the winners in this pandemic. Gold has jumped by nearly 30% since the beginning of the year, while silver metal is faring even better, up 35% since January. This affirms the fact that rare metals, particularly gold, provide safe haven during market volatility, the likes of which we are currently experiencing.
Getting exposure to gold
So how do you get exposure to gold in Australia? It turns out you have various options, but in my opinion, exchange-traded funds (ETFs) provide the best way to get diversified exposure to the gold market.
ETFs provide both liquidity and diversification, and here I consider three gold ETFs, each with a different twist:
The ETFs Metal Securities Australia Ltd (ASX: GOLD) is the largest gold ETF on the ASX with approximately $2 billion under management. This ETF provides exposure to physical ownership of gold bullions in a vault. The fund has a 1-year total return of 19% and a 5-year total return of 10% p.a.
The Perth Mint Gold ETF (ASX: PMGOLD) is a smaller ETF fund with lower management fees. With PMGOLD, the gold is unallocated which means you do not own the physical gold in your name. It is almost like a derivative security where investors get exposure to the price movements while not having ownership of the underlying asset. PMGOLD’s 1-year total return is 27.4%, while its 5-year total return is a respectable 11.15% p.a.
Finally, investors looking for exposure to gold could invest in the VanEck Vectors Gold Miners ETF (ASX: GDX). This ETF is slightly different to the previous two in that it invests in a variety of gold mining companies. According to its website, this ETF’s top three holdings currently are: Newmont Corporation (NYSE: NEM), Barrick Gold and Franco-Nevada Corp (TSE: FNV). Its 1-year total return is a healthy 38.5%, while its 5-year total return is an enviable 24% p.a.
(Note that the total returns of these ETFs assume the reinvestment of all dividends and distributions, not just the return on the share price over time).
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dsunarto has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Berkshire Hathaway (B shares) and recommends the following options: short January 2021 $200 puts on Berkshire Hathaway (B shares), long January 2021 $200 calls on Berkshire Hathaway (B shares), and short December 2020 $210 calls on Berkshire Hathaway (B shares). The Motley Fool Australia has recommended Berkshire Hathaway (B shares). We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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