The Motley Fool

What Might Be Behind Warren Buffett’s Barrick Gold Position?

Image source: Getty Images

Warren Buffett’s decision to take a position in Barrick Gold (TSX:ABX)(NYSE:GOLD) surprised many. Indeed, the Oracle of Omaha has been pretty vocal about his dislike for precious metals as an investable asset class. After all, a pile of gold isn’t that productive — it just sits there. A company, however, is able to produce more and more of a good, and create value. This value-creation aspect of investing is key to the investments Buffett has typically focused on.

I think Warren Buffett might have come around on the distinction between gold mining and gold itself.

Gold miners continue to be undervalued

Whether one likes gold or other precious metals as an investment or not, gold mining is a different story. Like any commodity that is in heavy demand, the supply side of the equation is important. Whether it’s an oil producer or housing manufacturer, Buffett has been involved in various commodities and commodity-related businesses over time. Gold production is key to maintaining a healthy supply of the precious metal to the market.

Gold has industrial uses and is used in various the production of jewelry and other value-added items downstream. However, this is mainly a speculative shiny metal folks hold onto as a store of value. The price of this shiny metal can fluctuate, like any commodity. It stands to reason, at least to me, that if Buffett can make big bets in other commodity sectors, gold really is no different. Barrick is a price taker, and its bottom line is really a function of how well managed the mining operations are.

This is where gold miners have failed in the past. In past gold bull markets, miners took on way too much debt, acquired deposits at unreasonably high prices, and collectively found a way to make this sector one to avoid from a balance sheet perspective. Today, gold miners are now trading at their lowest historical levels relative to the price of gold in roughly three decades! The buying thesis is strong with companies like Barrick right now. Accordingly, I can see why Buffett chose this company as a recently portfolio addition.

Why Barrick is a great pick

Barrick has done a great job of building a durable competitive advantage (or “moat”) in its industry. This is one thing Warren Buffett has talked about a lot in the past in terms of his investing criteria. Barrick’s gold reserves make it the top gold company in the world for large-cap, long-term investors bullish on gold to consider.

Whether you think gold is undervalued or not, Barrick makes a compelling case right now. Of course, the fact that Warren Buffett has stepped into this Canadian mining company makes this stock even more compelling. Indeed, I like the company’s size, its fundamentals, and the blessing it’s received from one of the greatest investors of all time.

Do you like this Warren Buffett-approved pick? Here are a few more I think he might like:

Just Released! 5 Stocks Under $49 (FREE REPORT)

Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $49 a share.
Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune.
Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.

Claim your FREE 5-stock report now!

Fool contributor Chris MacDonald has no position in any of the stocks mentioned.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.