Gold ripped higher today.
It had its best day in over a month, gaining as much as $11 before closing at about $1,103/oz.
Regular readers know that gold has been struggling. It gained 628% in a huge bull market from 2001-2011. Now, it’s down 42% from its all-time high. It dropped 17% in the past year alone.
But legendary resource investor Ross Beaty likes gold at today’s prices…
If you don’t know the name, Beaty is one of the most successful resource entrepreneurs of the last 25 years.
Beaty founded Pan American Silver (PAAS) in 1995. He built it into a powerhouse. By 2014, Pan American was producing 26 million ounces of silver per year.
Beaty also formed the group of Lumina Copper mining companies in the early 2000s. Since then, these companies have returned C$1.4 billion to shareholders… more than eight times the C$170 that shareholders invested.
In a recent interview, Beaty explained why he’s buying gold:
Why do I like gold? Partly because I’m a contrarian and nobody else likes it now, always a great bottom indicator. I like it because it’s money and has always maintained its value over millennia, and partly because its supply fundamentals are pretty good right now. Partly because it’s a kind of refuge in the storm that’s blowing around the world financial markets today with unprecedented moves in currencies and energy prices, geopolitical events, religious events, environmental events and on and on .
Beaty went on to say that he thinks gold will rise above $2,000/oz:
I’m not a real gold bug but I have to say that the older I get the more I feel comfortable in owning big gold resources in the ground managed by excellent people in low-risk deposits. Even if I’m wrong about gold and silver price moves (I expect gold will trade over $2000 an ounce by 2020 at the latest) these companies should outperform the market because they’re well run and have large mineable deposits at reasonably low gold prices, and if gold moves they will profoundly outperform the gold price.
More on gold in a moment.
• Another legendary investor is making his biggest purchase ever…
Warren Buffett is one of the best investors of all time. His investment company, Berkshire Hathaway, has gained 21.6% per year since 1965. The S&P 500 gained only 9.9% per year over that same period.
Buffett is one of the five richest people on the planet. He owns huge companies like fast food restaurant Dairy Queen, insurance company Geico, and battery maker Duracell.
Now Buffett is making his biggest buy ever. Here’s Bloomberg:
Warren Buffett’s Berkshire Hathaway Inc. agreed to buy Precision Castparts Corp., the maker of equipment for the aerospace and energy industries, in a deal valued at $37.2 billion, including debt.
Precision Castparts (PCP) makes parts for jet engines and power plants. It also makes pipes for the oil and gas industry. It sells to big companies like General Electric (GE) and Boeing (BA). Its stock jumped 19% on the news.
PCP had struggled for the past couple years. A significant part of its revenue comes from sales to the energy and power sectors. And, as regular readers know, the energy industry has cut back on spending. The price of oil is down 59% since June 2014.
The Wall Street Journal explains how the slowing oil and gas industry is hurting PCP:
Last month, the company fell short of Wall Street estimates for its fiscal quarter ended June, as profit fell 17%. Precision Chief Executive Mark Donegan told analysts that demand for the company’s products remained depressed among oil-and-gas industry customers. It had targeted the oil-and-gas sector as a growth market, but the recent fall in oil prices has hurt the company.
PCP is down 27% since the beginning of 2014, as the chart below shows. The S&P 500 is up 13% over the same period:
• Buffett has built a fortune buying out-of-favor companies like PCP…
Most investors would avoid PCP because of its bad recent performance. But Buffett saw an opportunity. Buying out-of-favor companies for a good price is one of his core strategies. He’s used it to build a fortune.
In fact, Buffett made some of his best deals during crises, when many investors were too scared to buy anything. For example, he invested in giant American financial companies like Goldman Sachs (GS) and Bank of America (BAC) during and after the 2008 financial crisis.
The Wall Street Journal reports that Buffett has made more than $10 billion from the investments he made during and after the financial crisis.
• Gold mining stocks are extremely out of favor right now…
Gold mining stocks are down 83% since mid-2011. Will Warren Buffett buy a gold miner next?
Probably not. It’s unlikely Buffett would ever buy a gold mining company. He likes to buy big businesses that grow steadily. He owns companies like Coca-Cola and underwear maker Fruit of the Loom.
Gold miners are not steady businesses. They’re explosive and cyclical. They go through huge booms and huge busts. The HUI Gold BUGS Index, a popular index of gold-mining stocks, gained 1,702% during the bull market that began in the early 2000s. Now, it’s down 83% since mid-2011.
Gold miners are more like lottery tickets than like steady businesses. But unlike lottery tickets, you can greatly increase your odds of getting rich if you buy gold miners at the right time.
One of Buffett’s most famous quotes is “Be fearful when others are greedy. Be greedy when others are fearful.” There’s extreme fear around gold miners right now. The S&P/TSX Venture, an index that includes many small gold miners, has dropped to its lowest level in history.
As you can see from this chart, the index goes through huge booms and busts. Up 274%… down 80%… up 405%… down 83%. Right now, it’s in its worst bust ever:
While this sort of cycle scares off most people, great speculators know it’s a huge opportunity. Busts are always followed by booms. They can hand you life-changing gains if you know where to invest.
Chart of the Day
Today’s chart shows how PCP’s stock skyrocketed today.
As we mentioned, PCP’s stock had been struggling. It was down 27% since the beginning of 2014.
On Monday, Buffett agreed to buy the company for $235 per share… or 21% above its market price of $194 per share.
PCP’s stock immediately jumped 19%. It closed the day at $231/share.
Delray Beach, Florida
August 10, 2015