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TICKERS: ABX; GOLD

Warren Buffett: From Gold-Hater to Gold Bug
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Peter Krauth Peter Krauth discusses Warren Buffett's big move into gold and discusses why the price of the metal is likely to climb much higher.

Warren Buffett has long been known as one of the biggest gold-haters around.

Yet in one move he's helped gold go mainstream.

The "Oracle of Omaha's" about face could be the ultimate Buy Signal.

For millions of investors, seeing Buffett dump banks while buying gold is likely to have a profound impact.

But as I'll show you, what's going on in the gold markets goes way beyond Buffett.

Around the world economic conditions have become so extreme, some people are desperately selling their gold, while others are happily buying it.

It's a sad state that proves gold has become more valuable than ever and yet, still has much higher to go.

Dig it Up, Bury it…Then Buy it!

Warren Buffett is widely known for his disdain of gold. For him, it apparently has no utility.

He famously said:

"(Gold) 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."

Yet recent 13-F filings show Berkshire Hathaway just bought nearly 21 million shares of Barrick Gold Corp. (ABX:TSX; GOLD:NYSE) worth $630 million, while selling shares in JPMorgan Chase (JPM) and Wells Fargo (WFC).

Clearly, he's had a change of heart.

This is a big deal, as it's sure to attract much more attention to a sector that is not widely followed.

And that could help support and propel gold to unimagined new heights.

Many self-proclaimed Buffett groupies will find themselves following the Sage's footsteps straight into the gold sector, helping them weather the coming economic storm.

But others are resorting to selling their gold to pay for essentials.

If anything, it's all demonstrating gold's increasingly critical role as both a store of value and a chaos hedge.

Gold is Proving Crucial Around the World

We already know the pandemic lockdowns have had devastating economic effects on business, jobs and the population in general.

But here are a few examples from around the globe that expose this fact on a granular basis.

In Madrid, Spain, some families have now gone several months with no income at all. They're resorting to food banks. Following the lockdown, as businesses were gradually allowed to reopen, a chain of stores called Compro Oro, which buys gold, has seen a booming business.

Customers carefully watch the gold price, and bring in pieces of jewelry to sell for badly needed cash. Meanwhile, many new small investors come in and buy, while other clients make large purchases of gold bars, even at current record prices.

In Lebanon, the story is similar. U.S. dollars have become scarce. Even before the Covid-19 pandemic and recent massive explosion that injured thousands, the country's banking system had broken down and inflation was soaring.

Armed with scarce greenbacks, gold dealers have been doing a brisk business. Many have resorted to selling jewelry and other gold items in exchange for U.S. dollars. Their gold gets melted down and shipped mainly to Europe where eager buyers await to shelter their assets.

In Bangladesh, jewelry shops have seen sales drop to nearly zero. Instead, cash-strapped families devastated by job losses and weaker incomes are selling gold and gold ornaments.

According to bdnews24.com Enamul, owner of Sharmin Jewellers, said, "People don't have money due to the pandemic. How will they buy ornaments? They are selling whatever gold they have to meet family needs." Jewelers are typically buying at 20% below market prices.

And in Turkey, the parallels are clear. Its currency, the lira, has been reaching its lowest levels in history versus the U.S. dollar and the euro. Unemployment is just under 25%.

Turks have been hoarding foreign currencies as they've watched theirs fall. It's a trade that's become all too familiar. But now many are trading in those foreign currencies for physical gold, as they've watched the metal climb to all-time record highs. Some are even contemplating selling their cars and houses to buy gold.

And while that certainly sounds extreme, it's also a sign of how dire conditions have become in many parts of the world.

Gold Needs to Digest Recent Gains

Over the past week, gold has bounced back with a vengeance after a hard selloff that took it down by over $200 from about $2,080 to $1,880 between August 6 and August 11.

Since then gold has been steadily climbing back and now sits around $2,000 as I write.

Still, the correction may not have been deep enough or long enough yet to shake out weaker hands. Renewed weakness could still take gold lower to its 200-day moving average near $1,850 or even $1,825.

These would certainly be levels that would make sense to either initiate a larger position or add to an existing one if you don't feel you own enough yet.

As for gold stocks, even news of Buffett's big purchase of Barrick Gold (NYSE:GOLD; TSE:ABX) may not be enough to shift momentum to buying on a very near-term basis.

GDX has yet to best its August high of $44.53. The most likely downside targets are $39 or perhaps even $37 as gold stocks continue to consolidate and work off some lingering froth.

The weakening U.S. dollar is providing some support as it continues to make new lows.

Any bounce to 93.5 or even 95 would likely help towards finding a near-term bottom for precious metals.

Given the macroeconomic picture, an argument could be made that gold's corrected enough and will either consolidate or resume its climb from here. If gold can close this week above $2,000, then this scenario will appear more likely.

Meanwhile, anyone who doesn't own any gold would be wise to start with at least a small initial allocation to gain some exposure.

Buffett's recent move into gold is pivotal as it demonstrates his lack of confidence in the macroeconomy, unbridled central bank money printing, and the eventual inflation effect.

And given his long-time well-known contempt for gold, this bold move should not be underestimated.

I'll keep tracking precious metals price action for their next moves.

Gold could still have to digest recent gains before resuming its climb. Expect volatility. But a legendary climb to unimaginable highs still lies ahead.

Peter Krauth is a former portfolio adviser and a 20-year veteran of the resource market, with special expertise in energy, metals and mining stocks. He has been editor of a widely circulated resource newsletter, and contributed numerous articles to Kitco.com, BNN Bloomberg and the Financial Post. Krauth holds a Master of Business Administration from McGill University and is headquartered in resource-rich Canada.

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Disclosure:
1) Peter Krauth: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: None. I personally am, or members of my immediate household or family are, paid by the following companies mentioned in this article: None. My company has a financial relationship with the following companies mentioned in this article: None. I determined which companies would be included in this article based on my research and understanding of the sector.
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