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Warren Buffett’s bet on Barrick boosts gold ETFs. What to watch in the soaring space

It’s been a great year for gold ETFs.

The group rallied Monday after it was revealed in SEC filings that billionaire investor Warren Buffett’s company Berkshire Hathaway initiated a $562 million position in miner Barrick Gold in the second quarter.

Exchange-traded funds that track physical gold, including the popular SPDR Gold Shares Trust (GLD), continued to climb Tuesday. The VanEck Vector Gold Miners (GDX) and Junior Gold Miners (GDXJ) ETFs reversed course, each falling less than 1%.

Year to date, however, the miners have outperformed. GDX and GDXJ are up about 46% and nearly 45% for 2020, respectively, while the GLD and its peers all mirror gold’s gains, up about 32%. GLD is now the sixth-largest ETF on the market, with more than $79 billion in assets under management as of Monday.

“It’s clear that ETF investors want to be in gold,” Dave Nadig, chief investment officer and director of research at ETF Trends and ETF Database, told CNBC’s “ETF Edge” on Monday.

He said the GLD’s assets could climb to $100 billion by the end of this year thanks to its mosaic of catalysts and association with gold’s “safe haven quality.”

“We just had the most amazing first half we’ve ever had. We had 734 tons of gold end up in gold ETFs,” he said. “That’s more than the best year we’ve ever had for gold ETFs, which was 2009.”

With gold supply down roughly 15% year over year amid coronavirus-related shutdowns and mining for the precious metal becoming increasingly difficult, “the supply side is a really bullish story,” Nadig added.

“We all know we’ve got a tumultuous six months ahead of us. I don’t really see anything getting in the way of gold here,” he said.

The demand side is a bit more complicated, however. Demand for gold bars fell to 11-year lows in the first half of this year and global appetite for jewelry has also been waning, leaving ETF buyers as some of the sole drivers of demand for the physical metal, the CIO said.

Even so, “there’s no question that investors are looking for safe haven assets,” Nadig said. “People are looking for something to hedge against potential inflation coming up, all the Fed easing that we’ve been seeing and also just the general state of the world right now. We’re looking for the next six months. Having a little safety doesn’t seem dumb.”

To Buffett’s point, there may be something to investing in gold miners, Nadig said — but he preferred a different method.

“We’re starting to see more activity in the miners and the junior gold miners as they sort of jockey for position and investors continue to look at gold as a safe-haven asset,” he said. “I particularly like junior gold miners here. I like that idea of having the opportunity to have your company get bought. So, not necessarily the same move that Berkshire’s making, but I think we’re going to see more activity in the space.”

Chris Hempstead, director of institutional business development at IndexIQ, said in the same interview that “with the price of gold going as high as it is, gold miners are more relevant now than they were before.”

“Maybe Warren Buffett saw value in the stocks. Maybe they’ve underperformed historically but now they’ve outperformed recently relative to physical gold,” he said. “Maybe now’s the time to be buying. I’m not sure I agree with the initial ‘chase the Warren Buffett trade’ immediately. I think there’s plenty of time to get in.”

Gold mining stocks do tend to carry more risk than ETFs tied to physical gold, Hempstead warned. Physical gold is simply stored in a vault, but when you invest in a gold miner, you’re buying into a full-fledged company with management, production facilities and the risks associated with them, he said.

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