Recessionary times are ones of great opportunities for investors with available capital. It is during distressed periods that great bargains appear, and fabulous deals are made.
The 2008-2009 Great Financial Crisis provided Berkshire Hathaway, Buffett’s investment vehicle, with the opportunity of acquiring stakes in AIG, for example, at incredible prices. Building a pile of cash during economic expansion and using it during recessions is a strategy that worked well for Berkshire.
Only this recession was different. To start with, the bearish stock market did not last long. The bounce back was so strong that even if you had the cash to buy something cheap, the market moved too fast to build a sizable position in the old way. So Buffett did not buy anything. Until now.
Berkshire Acquires Stake in Barrick Gold
Berkshire announced that it acquired a Barrick stock worth of $500 million, making it its first significant investment since the pandemic started. The news was greeted by investors that took the Barrick Gold’s share price higher 12% on the opening last Monday. Even the management saluted Berkshire’s arrival, as a sign of trust in how the company is managed.
The investment should be viewed from different perspectives. First, it is not that big. Half a billion for Berkshire is peanuts – its cash pile is much bigger than that. One of every company’s biggest concerns is working capital management. In other words, too much cash set aside and not put to its best use can easily affect a company’s bottom line. The Barrick’s stake does not affect the size of the cash reserves at Berkshire.
Second, the turn to the gold industry from a player like Berkshire tells a lot about the uncertainty ahead. Gold had a fantastic performance lately. Viewed as an anti-dollar investment, gold represents a bet against inflation.
Entering the gold industry at a time when the price of gold is close to all-time highs may mean that Buffett is fearing inflation. The size of the investment made in Barrick, a gold mining company, indicates that Berkshire looks at the diversification benefits brought by an alternative investment. Lacking other opportunities, building a small position in gold acts as a safety net for troubled times ahead, should they come.
It is the first move so far in the pandemic for Berkshire. Will other ones follow?