Warren Buffett's Japanese, Barrick Gold investments signal changing view on inflation

Legendary investor Warren Buffett’s latest investment in five Japanese trading companies is turning heads and could signal that he expects inflation to rise in the medium term.

A Japanese subsidiary of Berkshire Hathaway, the investment company headed by Buffett, has bought 5 per cent stakes in five Japanese trading companies in the past week.

The five trading companies are Itochu, Marubeni, Mitsubishi, Mitsui and Sumitomo. Berkshire Hathaway’s investment in these total about $US6bn ($8.2bn), according to reports.

When combined with Berkshire Hathaway’s recent investment in Canadian gold miner Barrick Gold, experts believe Buffett is taking steps to protect his investments from inflation.

Investments signal changing expectations on inflation

Ausbil global resources fund portfolio manager Luke Smith said Buffett and his investment firm could be taking defensive positions to hedge against the risk of higher inflation.

“The two investments he has made in the last month relate to a changing view around inflation on a medium-term basis,” he said.

“Inflation is a risk to investments and making an investment in gold is a starting point.”

Both investments — in Barrick and the Japanese trading houses — were step-out ones for Buffett and Hathaway, Smith said.

Buffett has traditionally bought US equities.

Gold: Ultimately a hedge for inflation

“Berkshire Hathaway in taking a stake in Barrick Gold is an apparent about-face on his previous view on the commodity, and it implies he is positive on inflation expectations. Gold ultimately is an inflation hedge,” Smith said.

The chief executive and chairman of Berkshire Hathaway once famously said of gold that it had no practical use, and had a serious drawback in not generating income, unless lent out.

Buffett’s firm bought 20.92 million shares in Barrick Gold in the June quarter at a cost of $US563.6m, according to company records lodged with the US Securities & Exchange Commission.

Gold in Australian dollars

Five-year gold price chart in Australian dollars: Goldprice.org

Buffett firm gaining exposure to cyclical commodities

“It seems to be another theme fleshed out by his stakes in Japanese trading houses, as 20 per cent of their exposure relates to cyclical commodities,” Smith said.

“Ultimately, what is being implied here with these positions is inflation will prove supportive for gold and cyclical commodities.”

Buffett has significant standing in the investment world and his moves are keenly watched and followed by retail and institutional investors alike.

Buffett’s investment in five of Japan’s trading companies. Source: FT, Bloomberg

Macro-economic forces supportive of gold

Gold investing has been a strong theme for retail investors this year, also fuelled by inflation expectations and loser monetary policy spearheaded by world central banks.

“The commodity has been strong, and we continue to expect gold will be well supported against this macro backdrop,” Smith said.

“Negative real interest rates are a major supporting factor for a commodity like gold, especially when combined with devaluation of fiat currencies.”

Real term interest rates are the return an investor receives after accounting for inflation.

Gold equities could outpace physical gold

In terms of the best bang for an investor’s buck, gold equities tend to do better than physical gold in a bullish gold environment.

“Gold equities perform better than direct investments in gold through bull cycles, and we are likely to see ongoing interest in gold equities,” Smith said.

Other pension funds could follow the lead of the US state of Ohio’s pension fund for police and fire personnel and invest in gold, he added.

The Ohio Police and Fire Pension Fund made headlines this week when it revealed it had decided to allocate 5 per cent of its $US16bn investment to gold as an inflation hedge.

Although Smith stressed that gold was a much smaller market compared with equities.