Warren Buffett, known to some as the Omaha Oracle, is one of the world’s largest investors and is used to assessing the risks of various asset classes.
This week, Buffett made headlines again, as he sold some of his shares in the largest U.S. banks, dropping his interest in Wells Fargo and J.P. Morgan Chase by more than $3 billion and setting his interest in Goldman Sachs at zero to invest in something he has disproved for years: gold.
In the case of gold, Buffett simply did not buy some gold properties, or gold derivatives, as one might suppose – Buffett bought 11% of one of the world’s largest mining companies, Canadian Barrick Gold – for $565 million.
For Buffett, the time is ripe for caution
Despite the excellent results of his investment firm, Berkshire Hathaway, which posted an 87% profit in the second quarter ($26 billion), Warren Buffett is cautious about the timing.
Used to buying up established companies and investing in well-known brands, Buffett has not made a major acquisition in 5 years, since he paid $35.2 billion for Precision Castparts, the largest purchase in his history as an investor.
The expressive result of Berkshire Hathaway is a direct consequence of the recovery that the stock market has been showing since the March crisis, a certain „irrational exuberance“, an expression coined by the American economist in the first decade of 2000 to summarize the excess of liquidity and the fever of the initial public offerings in the American stock markets. What happened next, everyone knows: a total collapse with the bursting of the Internet bubble.
Buffett believes that we are going through a period that resembles a bubble and according to his theory, he tried to protect himself by buying a gold mine.
Co-founder of Morgan Creek Digital: Buffett bought gold, will buy Bitcoin
The Buffett Bubble Theory
According to Buffett’s bubble theory, every time the stock market capitalization equals or exceeds the GDP of the richest nations, we face a bubble. When markets began to evaluate companies based on parameters such as the number of clicks, technology stocks skyrocketed in the 1999/2000 decade. At that time, many people criticized Buffett for losing technology stocks.
However, Buffett refused to participate in the dotcom rally. The dot-com bubble finally burst and most of the overvalued technology companies went bankrupt. Amazon was the most notable exception. Today, Amazon shares are part of the Berkshire Hathaway portfolio.
For Buffett, the current stock market rally has all the characteristics of a bubble. The world’s market capitalization is equivalent to 69 trillion dollars, summarized in 60 major stock exchanges around the world.
By way of comparison, the world’s GDP is currently around 56 trillion US dollars and is constantly growing, as the figures collected by the World Bank have not yet been consolidated. The GDP already calculated, which is 2019, was in the order of 87,265,226,000,000 dollars.
Some investors say that the price of Bitcoin can reach USD 50,000 thanks to the purchase of gold by Warren Buffett
According to Buffett’s theory, by the current numbers we are going through a bubble and it is precisely the shares of technology companies that are pulling the stock market rally.
The same theory applies to cryptosystems
Some analysts tend to say that the market for Corona Millionaire, and Bitcoin in particular, is just a bubble. However, if we apply Buffett’s theory to the market value of cryptomonies, we see a huge distance between the stock market and the crypto market in comparison.
The market capitalization of all crypt coins today is $384,636 million, a total of 6,495 tokens analyzed, with Bitcoin representing 2/3 of this amount. The gold market alone is worth $10.9 trillion.
Therefore, according to this theory, the market for cryptomonies is still far from being a bubble.