Warren Buffett's unusual gold bet could act as a great hedge against his 'hot beta' Apple stake

Published Mon, Aug 17 20201:39 PM EDTUpdated Mon, Aug 17 20202:33 PM EDT

Warren Buffett made an usual move last quarter — his company Berkshire Hathaway bought into gold miner Barrick Gold . Though it's unusual for Buffett, who has bashed gold in the past, analysts say it can be a shrewd hedge against a frothy market as well as a hedge against a jump in inflation. Here's a breakdown of the head-turning move: Berkshire initiated a bet in Canadian gold miner Barrick Gold in the second quarter, worth about $562 million. While the position is small for Berkshire, it made the conglomerate the 11th largest shareholder of Barrick. Many Berkshire watchers suspected it was done by Buffett's investing lieutenants, Ted Weschler or Todd Combs. It may act nicely to partly offset the risk from its concentration in Apple, which has taken up more than 40% of Berkshire's portfolio. "It's an inflation hedge but it's also a market hedge against the hot beta Apple holding," Cathy Seifert, a Berkshire analyst at CFRA Research. "He has sector risk in Apple and he has interest rate risk and credit risk from all the bank stocks, so quite frankly, the gold move is a prudent one." "Beta" would be a stock that moves inline with the market. Apple is so-called hot beta because its shares are up 56% this year, compared to a 5% gain for the S & P 500. Apple has become Berkshire's largest common stock bet with 245 million shares worth more than $90 billion at the end of the second quarter, up about $40 billion from the market's March bottom. Meanwhile, the conglomerate is still overweight financials after trimming some of its holdings in the previous quarter. Berkshire has been on a buying spree of Bank of America stock as of late. Other than the new Barrick purchase, Berkshire largely reinvested the proceeds from equity sales in Treasuries in the second quarter, which reflects "caution" in the current uncertain macro environment, Morgan Stanley analyst Michael Phillips noted. This cautious outlook makes sense with the new gold position. Inflation hedge Bullion has been widely hailed as a hedge against inflation since its value increases as the purchasing power of the dollar declines. Gold prices crossed $2,000 per ounce for the first time this month amid a flight-to-safety move. Its appeal as an inflationary hedge increased after the Federal Reserve and Congress pushed stimulus efforts to new heights, injecting trillions of dollar into the economy. "You would want to own Barrick Gold if you thought we are going to have a significant amount of inflation that comes from the massive amount of money printing," said Bill Smead, chief investment officer at Smead Capital Management and a Berkshire shareholder. "There's a wonderful inflation cocktail being stirred. It looks a lot like a Todd or Tedd purchase." Toronto-based Barrick Gold, the world's second-largest gold miner, saw its shares soar more than 10% on Monday after Berkshire's disclosure, pushing its 2020 return to more than 60%. Josh Wolfson, RBC's metals analyst said the gold miner offers quality and "ruthless" investment discipline. "A key differentiator of Barrick's business is the company's asset quality and duration.10-year guidance for Barrick uniquely outlines steady production and declining capital spending in upcoming years," Wolfson said. Buying a gold miner allows stock pickers to find winners in the sector from a valuation and earnings growth perspective, whereas outright buying gold is just pure bet on the commodity. "This is where the value-minded Berkshire Hathaway comes in," Seifert said. "Playing a gold miner is a way to get exposure to that area without necessarily paying the valuation premium that gold ETFs and gold stocks currently have." The most popular gold exchange-traded fund — the SPDR Gold Trust — has rallied more than 30% this year as investors flocked to safe-haven assets amid the market turmoil. 'I don't see gold as a store of value' However, the new position in Barrick Gold is an unusual move for Berkshire as the "Oracle of Omaha" has been vocal about his dislike for gold, preferring assets that have cash flows. During Berkshire's annual shareholder meeting in 2012, Buffett mocked the commodity as an unproductive investment. "I mean, if you own an ounce of gold now and, you know, you caress it for the next hundred years, you'll have an ounce of gold a hundred years from now," Buffett said then. In 2005, the legendary investor dismissed the metal as a store of value and said he would consider buying real estate or index funds before gold. "I don't see gold as a store of value. And it's — the truth is, it hasn't worked very well," Buffett said during a shareholders meeting. "I would say that gold would be way down on my list as a store of value. I mean, I would much prefer owning a hundred acres of land near here in Nebraska, or an apartment house, or an index fund." Buffett bought silver in 1997 However, this is not the first time Buffett tapped into the precious metal market. In fact, back in 1997, the billionaire investor owned more than 100 million ounces of silver based on a supply-and-demand call. "The present price for silver does not produce an equilibrium between supply, as measured by newly-mined silver plus reclaimed silver, and usage," Buffett said during a 1998 annual meeting. Berkshire sold its silver investment in 2006. "I bought it too early. I sold it too early. Other than that, it was a perfect trade," Buffett said in 2007. To be sure, Berkshire's recent moves have been hit-or-miss. While its Apple investment turned out to be a key winner this year, Buffett received criticism for bailing on airlines before their shares started to rebound. Subscribe to CNBC PRO for exclusive insights and analysis, and live business day programming from around the world.

Warren Buffett

Gerard Miller | CNBC

Warren Buffett made an usual move last quarter — his company Berkshire Hathaway bought into gold miner Barrick Gold.

Though it's unusual for Buffett, who has bashed gold in the past, analysts say it can be a shrewd hedge against a frothy market as well as a hedge against a jump in inflation.

Here's a breakdown of the head-turning move: