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Buffett Bought This Gold Stock: Should You Do the Same?

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When Warren Buffett makes a big move, many investors follow in his footsteps.  And although he hasn’t been a big fan of gold stocks in the past, his company Berkshire Hathaway recently disclosed a position in Canadian gold mining company Barrick Gold (TSX:ABX)(NYSE:GOLD). Berkshire holds 20.9 million shares of Barrick, and although it’s nowhere near any of its largest holdings, it’s still a notable buy.

Buffett is normally bullish on the U.S. economy and is confident of its long-term success. Investing in a top gold stock like Barrick suggests that, perhaps at least over the short term, he may be worried of trouble ahead. Investors typically turn to gold when there’s instability, whether it’s in the markets or just in the world in general. And during the COVID-19 pandemic, gold prices have been soaring. They recently hit all-time highs, climbing to more than US$2,000/oz.

Here’s how gold has moved along with the price of Barrick shares so far this year:

Gold Price in US Dollars Chart

Before the market crash hit in March and when things were still rosy, and before the coronavirus was making news everywhere, neither Barrick’s stock nor gold prices weren’t doing all that well, certainly not to the extent that they are today.

Should you be bullish on gold?

Despite gold prices recently coming off their all-time highs, that doesn’t mean they’ve peaked. The U.S. and Canadian economies are in the midst of recessions, and that may remain the case as long as COVID-19 cases are rising and people are staying at home.

Without strong economic activity, interest rates will remain low, and gold has an inverse relationship with interest rates. When interest rates are low, there’s little incentive in holding your money in the bank or in bonds, where you may earn just a nominal rate of return. And instead, gold becomes a better option, because if nothing else, it can store value and provide stability. As more people turn to gold, its value rises. This is why during a recession, and especially during a pandemic, gold prices may continue to rise for the foreseeable future.

Is Barrick Gold a buy?

As you can see from the chart above, there isn’t a one-to-one relationship between the price of gold and Barrick’s share price. If you’re bullish on gold, that doesn’t mean gold stocks are the answer and that they’ll take off. After all, you’re still investing in a business, and whether the stock’s a good investment depends on a variety of factors.

Today, Barrick’s shares trade at 11 times their earnings and a price-to-book multiple of over two. Those aren’t bad numbers for the gold miner, especially with it generating operating margins of more than 20% in each of the last four quarters. The stock is a decent buy, especially if you’re looking for a safe place to store your money and a modest dividend — Barrick’s shares yield 1%. However, you shouldn’t get your hopes up that just because gold prices are rising that investing in Barrick’s shares will produce significant returns for your portfolio.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor David Jagielski has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short September 2020 $200 calls on Berkshire Hathaway (B shares).

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