So far this year, the S&P 500 is up just under 20%, and few other assets have achieved the same kind of performance over the past six months. Tech stocks have led the index higher, but there is one sector that has put in a particularly impressive performance: gold miners.
Barrick Gold Corp. (GOLD, Financial), the world's largest gold mining company, is up around 39% in just a few months. Meanwhile, shares of Newmont Goldcorp Corp. (NEM, Financial) have gained 30% since the beginning of May.
These gold miners have rallied as the price of gold has headed higher. Since the beginning of the year, the price of the yellow metal is up around 10%. Since the end of October last year, it is up 18.6%. Investors seem to have increased their buying of the precious metal as economic uncertainty has increased, and the prospect of further quantitative easing has become more likely.
There's also speculation that central banks around the world are increasing their gold allocations to protect against currency volatility. There's certainly evidence to suggest this stockpiling is having an impact on gold prices.
The question is, could now be the time to increase your allocation to gold?
Buffett's gold guidance
If you are a follower of Warren Buffett (Trades, Portfolio), it is more unlikely that you are not interested in gold. The Oracle of Omaha has said on many occasions that he does not trust non-interest-bearing commodities such as gold because they are fairly poor hedges against inflation. Commodity prices have also failed to keep up with equity prices. He once said about gold:
"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 (KO, Financial) and will be making money, and I think Wells Fargo (WFC, Financial) 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."
Buffett does not like gold (or indeed any other commodity) as an investment, but he has traded silver and oil in the past. His silver trade earned a lot of money for Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) shareholders at the time (1997). Here's what the guru told shareholders about his silver trade at the 2006 annual meeting:
"So we have no silver now, and we did not make much money on it. And you're right that it doesn't earn anything. So you sit with it. It's not like sitting with a stock where, in most cases, earnings are piling up for you. You have to hope that it — you have to hope that a commodity moves in price because it is not producing anything as it sits there looking at you. And that's one of the drawbacks of commodities."
To put it another way, Buffett is happy to trade commodities, but not invest in them. Is it worth following his actions? If you are aware that it is a trade not an investment, it might be worth making the most of the spike in demand for gold.
Rising demand
According to Gold Focus, global demand for gold in 2019 will hit the highest level in four years of 4,370 tonnes as demand for jewelry continues to grow. Total purchases by central banks increased by 75% in 2018, though buying is expected to slip back by 9% this year to 600 tonnes.
Of course, this is all this speculation at this point, and no one can tell what the price of gold will be 12 months from now. It looks as if demand is building, however, and this could send the price higher in the medium term. Gold miners could be the best way to play this trend as they generate cash flows, while gold by itself does not. It's not an investment I would usually consider, but it is something that might be worth further research in the current environment.
Disclosure: The author owns shares of Berkshire Hathaway.
Read more here:
- Should You Be Using the S&P 500 as a Benchmark?
- Has Buffett Ramped Up His Share Buybacks?
- Warren Buffett's Process for Dealing With Investment Unknowns
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