Warren Buffett's shock bet on a gold miner is 'encouraging,' Berkshire Hathaway shareholder Darren Pollock says

  • Warren Buffett's Berkshire Hathaway invested in a gold miner last quarter, even though the billionaire investor has repeatedly warned against betting on the precious metal.
  • Berkshire's new stake in Barrick Gold is "encouraging," said Darren Pollock, a portfolio manager at Cheviot Value Management, which owns both Berkshire and Barrick stock.
  • "Gold should have the wind at its back for some time," he added, citing the soaring US budget deficit and rock-bottom interest rates.
  • Buffett may be picking winners with his stock-selling spree last quarter, record stock buybacks, and recent $2.1 billion bet on Bank of America, Pollock said.
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Warren Buffett's Berkshire Hathaway made a surprise investment in Barrick Gold last quarter, its latest portfolio update revealed.

It's a promising move by the famed investor's conglomerate, Darren Pollock, a portfolio manager at Cheviot Value Management, told Business Insider.

"The biggest and most encouraging news from the filing is Berkshire's willingness to buy a gold mining company despite Buffett's public dissertations against owning gold," Pollock said.

Cheviot has counted Berkshire as its biggest holding for more than 20 years, and it owned $39 million of the company's stock at the end of June. It also boasted a $10 million stake in Barrick after boosting the position by 30% last quarter.

Buffett has repeatedly criticized gold as an investment because it isn't a productive asset like a farm or business, and it has historically underperformed stocks.

Given his clear disdain for the metal, it is possible that one of his two investing deputies, Ted Weschler and Todd Combs, actually bought the Barrick shares, Pollock said.

"The younger portfolio managers are not beholden to Buffett's recent views on precious metals," he noted.

Pollock outlined several reasons why Berkshire may have decided to break from tradition and back a gold miner. 

1) The price of gold is strongly correlated to the US federal budget deficit, as a deficit signals to investors that the economy is suffering and they should park their cash in "haven" assets such as gold.

The deficit has ballooned this year, and may remain elevated for years as stimulus policies drive up government spending and a depressed economy weighs on tax revenues, Pollock said.

2) The gold price moves inversely to interest rates, as low rates make it more appealing for investors to buy gold instead of holding cash that earns almost nothing in the bank, or government bonds paying paltry yields.

The Federal Reserve is likely to keep interest rates low for years to encourage spending, minimize borrowing costs for consumers and businesses, avoid sparking a wave of loan defaults, and shore up economic growth, Pollock said.

"Gold should have the wind at its back for some time," Pollock said.

Berkshire's stock selection was also on point, he continued, as Barrick is "a top tier gold mining company, with mines in safe jurisdictions, run by excellent management."

"CEO Mark Bristow has overseen a great improvement in the business, reducing debt, keeping costs low, and achieving great increases in free cash flow," he added.

Banking on Berkshire and Bank of America

Buffett and his team slashed two of their biggest positions, JPMorgan and Wells Fargo, last quarter. They also ditched the "big four" airline stocks, dumped their remaining shares in Goldman Sachs, and trimmed their stakes in other financial companies including BNY Mellon, PNC, and US Bancorp.

As a result, Berkshire's net stock sales hit their highest level in more than a decade, Pollock said. The last time they came close to that amount was the fourth quarter of 2009, a year after the financial crisis struck, he added.

However, Berkshire's bosses went on to plow more than $2 billion into Bank of America stock in the three weeks to August 4. They also bought back more than $5 billion of Berkshire stock last quarter, and likely repurchased another $2 billion worth in July.

Buffett is arguably sending mixed messages by backing a gold miner and dumping stocks, then betting big on Bank of America and executing record share buybacks. He may simply be picking favorites, Pollock said.

The bank sales "may indicate that Buffett believes Bank of America is the best-positioned large bank to weather the difficult economic terrain ahead," he said.

Bank of America CEO Brian Moynihan has been a formidable leader over the past decade, and at 60 years of age, could be in charge for a while yet, Pollock continued.

Meanwhile, Buffett's record stock buybacks represent a wager on his own company, and Pollock is "quite pleased" to see aggressive repurchases at a compelling price.

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