Is Warren Buffett Betting On the Wrong Commodity As Gold, Silver Rally?

February 8, 2016

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(Kitco News) – Legendary value investor Warren Buffett is making headlines in financial markets as his company, Berkshire Hathaway (NYSE: BRK.B), announced that it increased its exposure to oil refining company Phillips 66 (NYSE: PSX).

On Friday, in regulatory filings, Berkshire Hathaway announced that it bought 2.54 million shares of one of the world’s biggest oil refining companies. Phillips 66 has a market cap of $42.36 billion. According to media reports, Berkshire now owns 13.7% of the company, increasing its position from 10.8% in August.  Phillips 66 is the sixth largest position in Berkshire’s portfolio.

The release of Buffet’s increased position in the oil refinery company came on the same day Phillips 66 reported a 43% drop in profits and a 38% decline in revenue. 

Some analysts have noted that Buffett’s expanded role in Phillips 66 is a bet on oil prices, which comes as prices remain under significant pressure. West Texas Intermediate (WTI) crude oil has struggled to hold gains above $30 a barrel, settling Monday’s session at $31.62 a barrel down, around 6% on the day. So far this year, WTI crude has fallen more than 16%. 

However, two commodities that Buffett has shunned and have been top performers, are gold and silver. While crude oil has dropped, Comex gold futures are holding near a three-month high, up more than 6% since the start of the new year; silver is up 3.7%. Comex April gold futures settled Monday at $1,1280 an ounce, up 1% on the day. March silver futures settled the session at $14.343 an ounce, up around 0.7% on the day.

Analyst have noted that the rout in the oil market is helping to drive safe-haven demand for the yellow metal.

Buffett is pretty famous for his dislike of commodities and gold, in particular saying in a 2009 interview with CNBC that gold does nothing but look at you. 

“… it’s a lot better to have a goose that keeps laying eggs than a goose that just sits there and eats insurance and storage and a few things like that,” he said. “The idea of digging something up out of the ground, you know, in South Africa or someplace and then transporting it to the United States and putting into the ground, you know, in the Federal Reserve of New York, does not strike me as a terrific asset,” he said during the interview. 

Buffett himself doesn’t see his bet in Phillips 66 as a commodity play, saying in an interview with CNBC in September: “We’re not buying it as a refiner and we’re certainly not buying it as an integrated oil company. We’re buying it because we like the company and we like the management very much.”

Interestingly Berkshire has also underperformed gold prices since the start of the year, down 1%, last trading at $128.75 a share.

By Neils Christensen of Kitco News;
Follow Neils Christensen @neils_C

Category: Gold