Gold Bug Bites Warren Buffet, But Is It Too Late For the Market Oracle?

Summary

• The value investor and market oracle – Warren Buffet finally turns to gold with Berkshire Hathaway purchasing large tranche in the global gold behemoth – Barrick Gold.
• The timing of the Omaha legend in gold is raising some eyebrows and a lot of speculation in the market.
• The gold spot market has recently cracked from its record high of USD 2,073.41 per ounce.
• However, the value investing approach from Buffet is unlocking another angle of the gold market and gold mining companies across the globe.

Gold bugs have finally bitten the market oracle and fundamentalist – Warren Buffet with Berkshire Hathaway picking up a large tranche in the global gold behemoth – Barrick Gold.

However, the timing of the Omaha legend in gold is raising some eyebrows and a lot of speculation in the market. Buffett and his long-time associate Charlie Munger are known for their value investing approach, and self-proclaimed anti gold investing principle. This move comes as a big surprise for all the Buffett followers and critiques.

The gold spot market has recently cracked from its record high of USD 2,073.41 per ounce (intraday high on 7 August 2020) to the level of USD 1,864.30 per ounce (intraday low on 12 August 2020); however, has again picked some gains with prices reaching a recent top of USD 2,015.45 per ounce (intraday high on 18 August 2020).

Also Read: Gold Hits life highs: Eight ASX-listed Gold Stocks Under Sentiment Splash

Is It Too Late For the Market Oracle?

Gold has been the darling commodity of the post-COVID-19 period with the market continuously betting on the shinny metal to hedge the portfolio against the impact of COVID-19 led economic meltdown on the equity market across the global front, prompting the spot market to hit record highs.

In the wake of a consistent rally in the underlying commodity, gold mining companies across the globe have witnessed an impeccable rally and have delivered some strong price gains and return on capital.

On the domestic counter, some gold stocks such as Northern Star Resources Limited (ASX:NST), Saracen Mineral Holdings Limited (ASX:SAR) have even outperformed gold over mounting production and higher average realised price, leading to a sentiment splash in gold mining stocks across the exchange.

Many of the large investment banks such as Goldman Sachs estimate that the gold price would average around USD 2,000 per ounce in 2020 while inching further to ~ USD 2,100 per ounce in 2021. Also, the whole COVID-19 scenario has provided gold with a new base of USD 2,000 per ounce as compared to its previous base of USD 1,500 per ounce, which now could obviously provide gold mining companies with a higher average realised price on sales as compared to a year ago.

An allocation to gold miners such as Barrick Gold, which largely remains focused on growth and volumes, does not seem odd, irrespective of the timing as a new base of gold is what is actually improving the fundamentals of many gold miners with large production ability.

Moreover, on the demand counter, while a recent surge in gold has made it a bit expensive in terms of investing, the demand from the jewellery sector is estimated by many forecasters such as the World Gold Council (or WGC) to pick momentum ahead amidst a gradual recovery in high-consumption economies such as China.

To Know More, Do Read: China- The Catalyst to Gold and Iron Ore Rally

Also, while the relentless rally in gold has kept the direct investment on the bay due to large volatility and high margin requirements, the recent correction in gold could be giving some respite for those sitting on the sidelines.

This speculation is well supported with the recent data from global gold-backed ETFs, which are still experiencing a large influx in gold- and silver-backed structured products.

To Know More, Do Read: Australian Gold-Backed ETFs – Massive Capital Influx, Impeccable Performance, And Record Values

The capital influx in the gold-backed ETFs across ASX has further inched with the ETFS Physical Gold (ASX:GOLD) hitting another record of YTD inflow from $587.9 million to $651.9 million, marking an increase of ~ 10.88 per cent (for the period ended 14 August 2020).

On a twelve-month basis, the same ETF have witnessed an inflow of $904.2 million (as on 14 August 2020).

Is Gold Rally Sustainable?

Gold spot prices have been well supported by a large influx from global gold-backed ETFs and from the central banks, taking shelter against the plunge in dollar.

The sustainability of gold now depends on the level of economic recovery ahead, which is now morphing into a W-shaped recovery, with a lot of uncertainty. However, one thing which is of interest is the ability of gold to hold its new price base of USD 1,800 to USD 2,000 per ounce, which could be a boon for gold mining companies with large production and low cost.

To Know More, Do Read: Gold- A Sprinter in the Marathon, Is the Price Rally Sustainable?

Also, many gold mining companies are now shifting their business strategies with gold miners such as NST on the domestic counter taking large exposure into the spot market while reducing the hedge gradually, which could keep a lock on the supply chain and support the gold market.

To Know More, Do Read: Gold Supply Disruptions and Paradigm Shift in Gold Miners’ Business Strategy

In a nutshell, while the timing of oracle of Omaha is raising some eyebrows in the market, it is also reflecting upon the other angle of the gold spot, which is relying on the new base established by gold and a gradual pick-up in demand from both the jewellery and the investment sector.

Furthermore, Buffett’s investment is an indirect approach investment in gold, which comes with its own benefit and risks. However, considering the paradigm shift in the global market brought forward by the COVID-19 outbreak, gold still stands tall in the eyes of many large investors.