Warren Buffett buying a gold stock is one of the most shocking pieces of news I have heard in quite some time. Over time, I read books that stated his views on gold. He has criticized it as being a non-producing asset, which it certainly is, that does not produce a yield over time. He is not wrong in this assessment, of course, but gold isn’t held because of its yield.
Furthermore, Buffett is also selling American banks. This further adds suspicion to what might be a bearish outlook on his part. I won’t presume to know his thought pattern or his outlook, but this certainly seems to be the way he is heading.
The bull case for gold stocks
I am bullish on gold and gold stocks going forward. I have been for a long time, and this latest news helps to solidify my opinion. It is entirely possible that there will be more US dollar bearishness as time goes forward. Money-printing, historically speaking, is a bad idea. A lower U.S. dollar could be the result.
Gold is traditionally a safe haven in times of crisis. With the metal recently hitting new all-time highs, it is likely that more investors will be drawn to the space.
Is Buffett’s choice a good pick for a gold stock?
Buffett decided to buy 21 million shares of Barrick Gold Corp. (TSX:ABX)(NYSE:GOLD) for Berkshire Hathaway Inc. (NYSE:BRK). I wish I bought it back in 2019, though, so I could have more than doubled my money by now. Oh well, c’est la vie.
But is it still a good buy today after its run? The answer is a resounding yes. Barrick is a huge gold company with a market cap of about $70 billion at the time of this writing. It’s very diversified with projects worldwide.
The company pays a small dividend, which might be a comfort to income-focused investors. Right now, the dividend works out to a yield of around 1%. This dividend was recently increased by 14% in the first quarter of 2020 and the dividend may be set to increase further.
The dividend is covered with a free cash flow of $522 million in the second quarter. This represents a 20% increase in free cash flow from Q1 2020. If gold prices remain strong, you can be reasonably sure that the company will continue generating strong free cash flow going forward.
The bottom line
Gold is an essential addition to any investor’s portfolio at the moment. There is a very high probability that the U.S. dollar could weaken significantly over the next few years. It is difficult to imagine that all this money-printing could be done without consequence.
For once, Warren Buffett seems to agree. At the very least, he sees the upside potential for gold stocks that will benefit from stronger prices. He has chosen to put his money behind gold stocks in the form of Barrick, a giant in the sector. Investors would be wise to do the same with this company or others in the sector.
