What Does Buffett’s Bet on Bullion Bode for Bitcoin?

Warren Buffett’s bet on the world’s second largest gold miner Barrick Gold shows that when it comes to investing, nothing is forever.

Tabitha Reid hated Tommy Galotti. She absolutely detested him. Sharing a cubicle with him was sheer hell, she often thought to herself.

He had the worst habits. Grinding his teeth whenever he was stressed, putting his calls on speakerphone, never clearings his wastepaper basket.

But yet at the same time he was also the sweetest man Reid had ever known, always a listening ear and never an unkind word.

And these thoughts flooded into Reid’s mind as she walked down the aisle, smiling to herself and looking up at her future husband’s beaming face.

Because there’s a fine line between love and hate.

And just because you may “hate” something or someone, doesn’t necessarily mean that they don’t provide value for you.

Mistakes Don’t Count If You Learn From Them

Which is why shareholders of legendary value investor Warren Buffett’s Berkshire Hathaway can rest assured that their investment is in good hands.

Buffett hasn’t been right all of the time and has made some investments which turned sour over the years, but more importantly, he hasn’t been afraid to admit where he’s made a mistake and embrace what was in the ultimate interest of his shareholders.

Take for instance the name of his investment holding company — Berkshire Hathaway — which serves as a poignant reminder for Buffett about the lapse in judgment he made by buying the failing textile company.

Thinking that he would make a profit when more cotton mills closed, Buffett loaded up on the stock of Berkshire Hathway.

But when the mill’s owners tried to squeeze Buffett out of more money, an enraged Buffett bought total control of the company, fired its managers and tried to keep the textile business running for another two decades, burning through US$200 billion in the process.

From that painful episode, Buffett learned how important it is not to let emotions factor into financial decisions and retained the name of Berkshire Hathaway as the holding company for his other investments — as a reminder of that.

Buffett is no stranger to high profile mistakes.

A self-admitted Luddite, the billionaire investors long resisted using a smartphone, sticking to his flip phone even as Berkshire Hathaway doubled down on Apple stock in 2016.

But speaking to CNBC earlier this year, Buffett said he wished he bought Apple long before he did,

“I should have appreciated it earlier.”

And that ability to embrace when he’s been wrong has made Buffett one of the most successful investors in history.

And despite admitting that he doesn’t invest in businesses he doesn’t understand, Buffett has also conceded that he missed a huge opportunity by not investing in Amazon and Google.

In fact, over the past two decades prior to 2016, Buffett’s technology investments had been few and far between.

And when Buffett was approached by Google prior to its 2004 IPO, Buffett passed on the investment because he couldn’t understand how Google would produce a profitable and durable competitive advantage over its peers.

That all changed in 2016.

Despite still clinging on to a flip phone (Google that) and resisting an iPhone in 2016, Berkshire Hathaway doubled down on Apple stock.

And today, Apple stock makes up almost 43% of Warren Buffett’s portfolio with Berkshire Hathaway.

All That Glitters Is Gold?

So when Berkshire Hathaway announced that it had bought roughly half a billion dollars’ worth of stock in Barrick Gold, it immediately sent the stock price of other gold producers soaring as well.

The reason?

Buffett has long been an outspoken critic of gold and as recently as 2014, Buffett derided gold as being fundamentally useless,

“(It) gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

And while gold may be inert and “useless,” for many investors that’s gold’s very value proposition — as a store of wealth — and a form of good “money” (here we use the term “money” relatively broadly).

One of the reason’s why Buffett doesn’t like gold is because he believes in “investing in America,” in businesses that are “active.”

“The problem with commodities is that you are betting on what someone else would pay for them in six months. The commodity itself isn’t going to do anything for you. It is an entirely different game to buy a lump of something and hope that somebody else pays you more for that lump two years from now than it is to buy something that you expect to produce income for you over time.”

“I have no views as to where it will be, but the one thing I can tell you is it won’t do anything between now and then except look at you. Whereas, you know, Coca-Cola will be making money, and I think Wells Fargo will be making a lot of money and there will be a lot — and it’s a lot — it’s a lot better to have a goose that keeps laying eggs than a goose that just sits there and eats insurance and storage and a few things like that.”

But that’s not what gold does, gold has long been viewed as a store of wealth and a hedge against inflation through the debasement of money.

And to be sure, Buffett hasn’t bought gold per se, Berkshire Hathaway bought a dividend-paying gold mining company, which could just as easily have been mining copper or even (gasp) Bitcoin.

Nevertheless, the change of direction is still a big deal for gold and gold miners.

Although tiny relative to the stock and bond markets, that Berkshire Hathaway has dipped its toe into the gold industry will certainly lead others to take the sector more seriously.

Because there are countless Buffett trackers and copycat vehicles whose investment philosophy is simply to ape the Oracle of Omaha, Berkshire Hathaway’s buy-in to Barrick Gold will almost certainly see other value investors hunting for bargains in similar firms.

More importantly, Buffett’s move draws increasing media attention, more analysis and more coverage.

And with increased analysis, more investors will discover better value further down the gold industry’s value chain as new money works its way through.

But What Does this Have to Do with Bitcoin?

A lot actually.

Just like how there’s a fine line between love and hate, Buffett is (hopefully) no longer naive enough to invest on the basis of emotions.

He’ll make a move if the financials make sense, just as he did with Apple as well as with the airlines — it doesn’t matter what he was quoted as saying in the past.

With the economy was flooded with unprecedented fiscal and monetary policy measures from central banks, Buffett has bet on gold miners to deliver bullion, as demand grows.

When it became clear in the earlier part of this year that Buffett’s recent acquisition of airlines (despite having resisted buying airline stocks for so long), was going to fair badly in the wake of the coronavirus pandemic, Buffett had no qualms about cutting his losses.

Given Buffett’s mental tenacity to change his mind when the circumstances require it, there’s more than an outside chance that he will flip on Bitcoin as well — but not right away.

Already, some of the biggest names in Wall Street are betting on Bitcoin and cryptocurrencies.

As money pours into the financial system to shore up economies embattled by the coronavirus pandemic, more than a handful of the biggest names on Wall Street are betting on Bitcoin and cryptocurrencies as a hedge against inflation.

Billionaire macro hedge fund investor Paul Tudor Jones was one of the first to announce publicly at the beginning of this year of his “speculation” into Bitcoin.

And earlier this month, banking giant Goldman Sachs named a new head of digital assets in a bet that blockchain is the future of financial markets — this despite coming up with five reasons why Bitcoin and cryptocurrencies are not an asset class, in a widely publicized call with investors in May.

Let’s also not forget JPMorgan Chase CEO Jamie Dimon infamously deriding Bitcoin as a “fraud” in 2017, only for his bank to create its own blockchain-based JPM Coin for internal settlements soon thereafter.

Not to be left out, Warren Buffett himself has called Bitcoin “probably rat poison squared” — but notice how he caveats that opinion with “probably.”

The reality is that dynamic circumstances call for dynamic perspectives.

And as Buffett’s Wall Street counterparts have proved time and time again — nothing really is set in stone — there really aren’t any absolutes.

Berkshire Hathaway’s bet on Barrick Gold proves that an astute investor ultimately approaches things with a rational perspective — no room for ego or emotion here.

And given the oft made comparison between Bitcoin and bullion, it’s perhaps only a matter of time before Buffett ups the ante on Bitcoin the way he did for Apple and gold.

Rat poison can just as quickly turn to gold.

Maybe when Bitcoin hits US$50,000?