Rock beats Paper: Berkshire Hathaway turning to Gold (ADX Visualisation using Python)

4 min readAug 18, 2020

Warren Buffet, a value investor’s god and the CEO of Berkshire Hathaway once quoted:

“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.”

Ever since the Gold Standard era began, Gold has been viewed as an inflation hedge against purchasing power risk. The purchasing power of a currency mostly follows an inversely proportional relationship with gold. In other words, Gold can offer you returns, when the other assets can’t.

From the past few months, many investors turned to a perception which believed that the Covid-19 shutdowns and lower interest rates might just devalue paper based currency and stoke inflation. That perception can be visualized below, as Gold Spot Prices moved upwards with the Covid-19 spikes in the second quarter of 2020.

Gold Spot Price (1 year), Source = Thomson Reuters

Berkshire Hathaway’s Gold Mining Investment

On the late evening of 14th August, Berkshire Hathaway disclosed an investment of $565 million in Barrick Gold Corporation (TSX: ABX.TO), the second-largest gold-miner in the world. This stake was bought at the end of the second quarter and the current 13-F filing reveals major unloading in the banking & financial sector firms such as JP Morgan Chase (NYSE: JPM) and Wells Fargo (NYSE: WFC) amounting in billions of dollars. This has caused quite the chaos in financial markets across the globe, as it raises the following questions:

Is Buffet making a ‘u-turn’ on his previous comments on Gold ?

As of now, Berkshire Hathaway have given no public statement on their additions and subtractions but many investors believe that this investment in Barrick Gold might not be a Buffet hold. If you closely follow Buffet’s major investing pattern, his positions tend to be in multi-billion dollars as it drives Berkshire Hathaway’s market value. Todd Combs or Ted Weschler, two portfolio managers at Berkshire Hathaway are speculated to have taken this position at Barrick Gold, as they usually tend to hold positions which are less than one billion dollars. Another thing to note is Berkshire has not invested in GOLD, but a GOLD MINING stock. While the gold mining stock will pay him dividends, the commodity gold won’t. So Warren Buffet might not be taking a ‘u-turn’ after all and might still consider gold as a ‘static asset’.

Is Buffet betting against the US Economy ?

Buffet’s shorting of JPMorgan Chase, Wells Fargo and remaining of his Goldman’s stakes has created a rumor in the market as the Oracle of Omaha might be secretly betting against the US Economy. Although, this rumor might just be a self-drawn conclusion of stalwart market bears and gold bugs. Berkshire still holds major stakes in the banking and financial sector with Bank of America (NYSE: BAC) leading the line. Additionally, a position of $565 million is relatively very small compared to Berkshire’s total portfolio value which resides in multi-billions.

Average Directional Index (ADX) Visualization of Barrick Gold Corp

For now, most of us can concur on the fact that the media hype is driving the price of Barrick Gold Corporation. Now, let’s evaluate Barrick’s equity price and the technical analysis of the equity using the indicator Average Directional Index (ADX).

ADX determines the trend of an equity movement. It measures two directions of trend, +DI i.e. Positive Directional Indicator and -DI i.e. Negative Directional Indicator. ADX in-turn takes the average of these two movements. Consider a long only strategy, the stock is oversold (strong trend) if the value of ADX is greater than 25 while the stock is overbought (weak trend) if the value of ADX is less than 20.

As you can see the ADX indicator currently tells us that Barrick Gold’s equities are currently overbought (value less than 20) which showcases a weak trend driven by the hype created by media and staunch bears. You can also observe the massive spike in trading volume of the equity on the next trading day (17th August 2020). The Python Code for this plot can be found on my GitHub.

Careful !

The views above do not suggest whether to long or short Barrick Gold Corporation’s or any other firm’s stocks. These are just the views of an academic and a regular market watcher. You are solely responsible for the trades that you make. Just be aware of the following points before you trade:

Gold equities are more volatile than the commodity gold.
If the interest rate of market or the purchase power of the currency rises, gold may fall.
Governments can manipulate gold, so trade with caution.

Rock beats Paper: Berkshire Hathaway turning to Gold (ADX Visualisation using Python)

Berkshire Hathaway’s Gold Mining Investment

Average Directional Index (ADX) Visualization of Barrick Gold Corp

Careful !

Sources

Written by Udit Nagar