Why Warren Buffett Could Take Barrick Gold Stock on a Parabolic Ride

I think Warren Buffett’s recent addition of Barrick Gold wasn’t just a foray into this stock. I think he’s looking for a long-term parabolic move in gold.

| More on:

Warren Buffett’s recent portfolio addition of Barrick Gold (TSX:ABX)(NYSE:GOLD) last year took the market by surprise. Indeed, the Oracle of Omaha has not been keen on investing in gold during his ultra-successful multi-decade long investing career.

That said, this divergence from his previous investing mantra is worth investigation. I think Warren Buffett could be coming around in his thinking on gold as an investable asset class. In addition, I think Buffett could be considering the following factors, which could take gold on a parabolic ride in the years and decades to come.

Bull market in gold shaping up

I’m a staunch believer in the idea we’ve got a long-term bull market in gold on the horizon. Forget being in the middle-innings of a bull market in precious metals. I’m talking about being a year into a multi-decade long run in gold and precious metals.

My thesis is this: we’re likely to see U.S. stimulus outpace the rest of the world for quite some time. I think the U.S. dollar could depreciate to levels we haven’t seen in decades. Additionally, I think some serious inflation is bound to be on the horizon if we see these scenarios play out.

Gold happens to be an asset that does very well in this environment. If one believes the economy is unable to be maintained without massive ongoing stimulus, gold is an investment worth considering. As well, if there’s consensus that we won’t see the U.S. dollar maintain its global leadership in terms of currencies, gold is the way to go.

I think there are a tremendous number of long-term factors that make a long-term bull market in gold likely. Accordingly, I think Barrick is a great way to play this space.

Gold miners provide incredible leverage to gold prices

Gold bulls ought to seek out equities that will provide the greatest leverage to rising gold prices. After all, if one thinks we’re on the precipice of an impressive run in gold prices, one ought to try to maximize one’s exposure.

Gold miners typically carry high levels of leverage, providing investors with outsized returns when gold prices rise. When the price of gold rises, margins increase and cash flows surge. Balance sheets improve, and more cash is available to be distributed to shareholders via buybacks or dividends.

Accordingly, rising gold prices hit the bottom lines of gold miners directly. Thus, a 25% move in gold prices could equate to a 75% or 100% increase in profit to a gold miner, a factor that should drive these equities much higher than the appreciation in the underlying commodity.

Barrick is one of the largest gold miners out there. This is a company with extremely large gold reserves and the ability to increase production for decades to come. For those looking for a long-term play on gold, this is the top company to consider right now.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Chris MacDonald has no position in any of the stocks mentioned.

More on Dividend Stocks

how to save money
Dividend Stocks

Top Canadian Financial Stocks to Buy Now

These financial stocks are top choices for those looking for long-term income, along with security for life!

Read more »

money goes up and down in balance
Dividend Stocks

Passive Income: How to Invest Your $7,000 TFSA Limit

This TFSA strategy can boost yield while reducing risk.

Read more »

stock research, analyze data
Dividend Stocks

The Easiest Way to Boost Your Income for Life

Investing doesn't have to be difficult, scary, or risky, especially when considering a stable ETF like this one.

Read more »

bulb idea thinking
Dividend Stocks

3 Smart Canadian Stocks to Buy for Monthly Passive Income

Do you want to easily earn steady monthly passive income? These three Canadian real estate stocks are an exceptional buy…

Read more »

Silhouette of bull in front of setting sun
Dividend Stocks

TSX Bull Market Winners to Buy Aggresively

Instead of letting your savings sit idle in low-interest accounts, investing in these two top dividend stocks could help you…

Read more »

woman analyze data
Dividend Stocks

3 Top Dividend Stocks Canadians Can Feel Confident Buying Aggressively

You may not usually think of these dividend stocks first, but each offers a strong reason to consider adding them…

Read more »

dividend growth for passive income
Dividend Stocks

Income and Growth: These Dividend Stocks Could Actually Beat the Market

Are you looking to beat the market? Here are a few dividend stocks that could beat the market by giving…

Read more »

ways to boost income
Dividend Stocks

The Best Restaurant Stock to Invest $500 in Right Now

Pizza Pizza Royalty (TSX:PZA) is one of the best restaurant stocks to invest in right now.

Read more »