The Midas touch: Buffett kicks off the 2020 gold rush

It took no less a figure than the world’s greatest investor, Warren Buffett, to light the fuse for gold investors. Picture: AFP

It took no less a figure than the world’s greatest investor, Warren Buffett, to light the fuse for gold investors. This week the Sage of Omaha, after many years bemoaning the failings of gold as an investment, went and changed his mind.

Buffett’s Berkshire Hathaway group popped up with a $US564m ($784m) shareholding in Barrick, the giant Canadian miner. Perhaps a minority of investors may know of Barrick because it used to co-own the Kalgoorlie Super Pit, the giant WA gold mine you can see from space.

But just about everyone knows Warren Buffett and suddenly gold — in all its forms — is on the agenda.

As Micheal Blomfield, the head of Investment Trends, said this week: “In the past gold was only for the very rich — those with $10m were active in the market and that is not a big enough group to come up in our surveys. We find very few investors still consider gold as any option, but maybe they could.”

Buffett is getting the headlines, but more than a year ago one of the top Australian fund managers, David Paradice, revealed he had taken positions in three gold miners: Northern Star, Westgold and Silver Lake.

Similarly, Michael Hintze, the London-based Australian hedge fund billionaire, had announced investments in gold miners Resolute and Ausgold.

Now in August 2020, it’s clear that any investment in gold has most likely been a big winner, with direct investment in gold miners invariably more lucrative than investments in safer options such as bullion or gold-focused exchange-traded funds. Gold has managed a price lift this year which is better than the lift on the Nasdaq. Hovering around $US2000 an ounce, it started the year at $US1500.

Will it go higher? Absolutely nobody knows, but the signals that drove bullion higher are still very much in place.

In fact the attractions of gold remain clear: we have rock bottom interest rates, a declining confidence in currencies off the back of the money-printing spree at central banks, fears of inflation and the return of government buyers in the gold market. Last year central banks around the world bought 650 tonnes of gold, the second-highest total in 50 years, according to the World Gold Council.

The dangers of gold are also there for all to see: it can fall like a stone if the climate of fear in the wider market recedes — in 2013 it fell by 35 per cent — and of course it does not pay income. But then again, a new argument for gold is that cash does not pay income either.

So why not swing some allocation towards the yellow metal?

That choice is up to the investor. If they decide to invest, the next question is how to do it.

The emergence of Buffet, Paradice, Hintze and others in gold stocks changes the game — it moves the proposal up the risk curve towards individual gold miners and that is a very different investment category.

In return for the extra risk of buying an actual gold miner in production, the investor can look forward to the possibility of a rising share price and a dividend stream.

No surprise then to hear Barrick Gold pays a dividend. Indeed many of our biggest and best-known gold miners also pay dividends: Evolution, Newcrest, Northern Star and Saracen stand out.

But things can go very wrong in gold mining with strategic mistakes, technical errors, hedging horrors or worse. Earlier this week gold miner Resolute, which has operations in Australia and Africa, fell 17 per cent in a single session after a military coup in Mali. It’s a question of how high up the risk curve you’d like to go.

Tom Stevenson, investment director at Fidelity International, lays out the reality. On one hand we might just be at the start of this gold boom. In 1979 gold prices began a bull run which saw the price quadruple. On the other, if “inflation fails to show up it would be a recipe for a sharp retracement in gold price from here”.

For some the only choice will be gold bars in a vault as the ultimate security in uncertain times. That’s the sort of client they have at goldswitzerand.com of Zurich, which offers what it calls the largest private gold vault in the world deep in the Swiss Alps which is “nuclear bomb proof, earthquake proof and gas attack proof’’, but you’ll need $US5m to apply.