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Why Warren Buffet Dumped His US Bank Stocks for Gold

Finance

Why Warren Buffet Dumped His US Bank Stocks for Gold

by | Finance

Ben Constanty

CEO, Smartlink

Disrupting online payments with smart contracts.

In recent news, you may have seen Warren Buffet, the famed investor and founder of Berkshire Hathaway dump a sizeable position in bank stocks.

To replace those investments he established a position in Barrick Gold Corp., a Toronto-based mining company.

  • Reduced Wells Fargo stake by 26% to 237.6M shares.
  • Reduced J.P. Morgan stake by 62% to 22.2M shares.
  • Liquidated remaining 1.9M shares in Goldman Sachs.
  • Added 20.9M shares worth $563.6M in Barrick Gold Corp.

For an investor such as Buffet, these are substantial moves, and the investing world took note.

🔎 Key takeaways

  • Banks are struggling due to lower interest rates
  • Inflation could increase soon and gold has always been one of the best hedges against it
  • The economy could be going through a prolonged period of recession

Interest Income

Low interest rates make the banks struggle

One reason that financial institutions such as banks are struggling is in part due to lower interest rates.

Banks make their money through interest income and with rates near zero, it is becoming increasingly difficult for banks to make money through traditional lending.

Lending has become tighter because of COVID-19 and the economic impact, which means less loans.

Combined with lower rates it became a double-edged sword. Instead, banks must turn toward alternative investment options to help boost the bottom line.

Inflation

Inflation could increase in the next few years

The move towards gold for Warren Buffet could signal an increase in inflation.

We already know that the Federal Reserve has made it clear they want to raise inflation going forward. Officially, the average inflation rate is 2%, but recently it has been slightly lower.

It’s difficult to raise inflation right now given the environment and lack of consumer spending.

Also, the strength of the U.S. Dollar has been brought up this year. Combine that with the IMF talking about a centralized digital currency, it makes the argument for gold much stronger.

Traditionally, gold has been a hedge against volatility and inflation, with a reputable store for wealth.

Continued Economic Trouble

Real estate as an alternative to ETF

Lastly, the move from Buffet could signal continued economic trouble. The pandemic is far from over and the United States just finished a presidential election.

Looking towards the Fed, they said no options are off-limits, except for negative rates.

When rates or financial uncertainty are present, bank stocks are extremely volatile as they are sensitive to all money related issues.

However, keep in mind that Buffet still has a stake in Bank of America, along with various insurance companies.

Why Gold is Potentially a Good Investment

Gold is good hedge against inflation

We already touched on it, but gold can make a good investment for a variety of reasons. You can lump silver into this discussion as well.

If you are looking to preserve wealth with a tangible asset, then gold is a perfect option. Over the last thousand years, we know gold has remained strong in value.

There are two ways to gain gold exposure and ultimately it is up to you. One is gold bullion, which are coins you can purchase online or through coin shops.

The second is through mining stocks or an ETF that tracks precious metals. Many favor the physical product because it is tangible.

Keeping an eye on what Warren Buffet does going forward can help direct attention to areas of the market that may be vulnerable.

However, it is up to you to complete your own duel diligence and find what works for you.

Ben Constanty

CEO, Smartlink

Disrupting online
payments with smart contracts.

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