Warren Buffett has never been a fan of gold $GOLD and has said so many times that it is not a value producing asset and only fearful people buy gold. But recently, Berkshire Hathaway $BRK.B invested over $500 million in Barrick Gold $GOLD.BARRICK .
Gold is mostly used as a hedge and has very limited industrial uses. That's why during recessions, gold prices rise while the price of other commodities usually fall. What really moves the price of gold is fear in other asset classes. According to Warren Buffett, Gold doesn't have any intrinsic value. What it really has is a cultural value that for over 5000 years, it has been used as money and has more or less kept the same value. The only time Warren Buffett invested in metals was in 1997 when he bought 3500 tons of Silver $SILVER but that was just because he saw a supply gap and not really because of inflationary fears.
That's why Warren Buffett invested in a gold miner, rather than gold. Because a gold miner has intrinsic value, it can produce cash flow and can potentially return these cash flows to shareholders through dividends or buybacks. We also need to acknowledge that it is Berkshire Hathaway which invested in Barrick Gold and it may not be Warren Buffett, himself, since there are other asset managers there such as Todd Combs and Ted Weschler. But if Berkshire Hathaway is investing, as value investors, we need to look at Barrick Gold.
Barrick Gold is the second largest gold miner in the world by market cap and number one by revenues. It is one of the lowest cost big producers, that is, it has a quite low AISC. When investing in gold miners, the AISC (All in Sustaining Cost) is the most important number to look at. This is the amount of money it takes to produce one ounce of gold. Barrick Gold's AISC is about $1000, in other words, if gold prices are $2000, they make $1000 profits on each ounce.
The problem with Barrick Gold, however, is that they are already a big miner and they need big capital expenditures to continue growing. They are currently producing about 5.5 Moz of gold a year and at this rate will run out of gold in 13 years, that's why they have been making acquisitions recently.
Compared to the big gold miners, Barrick Gold seems to be the most attractive one for a value investor and that's why I think Warren Buffett is investing in it but it is not the best gold miner. Warren Buffett's portfolio is big and his investment options are limited. He needs to buy big companies but we can invest in small companies. For example, I have Polymetal $$POLY.L in my portfolio, a Russian gold miner which I have been buying since last year. The AISC of Polymetal is about $800, hence lower than that of Barrick Gold.
The best time to invest in gold miners would have been last year (my profits on Polymetal are already over 75%) but it is not too late. There are several gold miners which might be cheaper than Barrick Gold and Polymetal and since gold prices are expected to rise in the coming years with the expansion of the money supply, we can expect gold mining stocks $GDX in general to rise. But you always need to be careful with commodity stocks since they are very risky.
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