This week’s economic news was dominated by two large transactions. Warren Buffett announced that Berkshire Hathaway will be purchasing Burlington Northern Santa Fe Corporation (BNSF) for $34 billion dollars. Within the same 24 hour span, the Reserve Bank of India bought $6.7 billion worth of gold from the IMF, pushing up the price of gold even further. The scale of the numbers are mind-boggling for most of us to comprehend but what does it mean to the average investor and consumer?

1. The movement to hard assets has now become a stampede. Railways are indirectly linked to coal and lumber, two of the larger types of goods shipped by rail. Buffet and governments do not move to hard assets unless they believe the immediate future will continue to be uncertain since hard assets are conventionally considered a safe refuge for uncertain times.
2. This can been seen as a bet against the American economy. Buffet has spun the purchase as an endorsement of America and American business and may see it this way. But look at where BNSF’s track lines are- they mostly orient westward with lines ending (or beginning depending on how you look at it) in Seattle, LA and Vancouver: three of the largest ports receiving or sending goods to destinations in Asia. In other words, BNSF is transporting  goods to be shipped towards Asia and its growth will be dependent upon the growth of the shipment of raw and finished materials to Asia (a cynic wonders if this was a better geo-political bet in Asia without actually investing in an Asian business which got Buffet a lot of negative publicity).
3. Will the run-up in gold mean a rise in interest rates and a quicker end to government spending? Gold moves in opposite directions as the US Dollar since when people do not have confidence in the USD, one generally moves to gold as a safe haven. Although there is an interesting argument that a weak US Dollar does not matter- to Americans anyways- the Federal Reserve may have to eventually defend the dollar by raising interest rates sooner than expected. Some have argued that a low US dollar is necessary to make America a producing and exporting, rather than a consuming, nation again. If that happens quickly, will this prompt a quicker end to government stimulus spending? (If you believe this thesis, Buffet once again comes out smelling like roses because the only nation really consuming now is China. Buffet owns the railway that will transport many American made goods to ships destined for China. Basically, Buffet hedged his investment every way).
4. This can be seen as a bet that the green movement will not succeed in the short term. Railway traffic is dependent on coal shipments (remember coal fuels most older electricity plants) which is the good most heavily shipped by rail. Coal is one of the oldest and dirtiest of fuels. If Buffett is indirectly betting on coal, is he really saying alternative fuel sources are not going to replace traditional fuel sources in the short term? Is Buffet also saying that investing in rails means he also thinks oil prices will begin to climb again since rail transport is cheaper than trucking or other oil dependent modes of transport?

If you are an investor and you are curious, there are several reasons why Buffett invested in a railway (other than listed above). Mergers among the big players in railways will most likely not happen in the near term for regulatory reasons (unless Buffett and Gates, who directly and indirectly is the largest shareholder of CN, somehow manage to twist a bunch of regulator’s arms). Thus, if you can’t afford to purchase Berkshire Hathaway shares, you will have to buy shares in BNSF’s competitors. To this end, Money Energy has an excellent recent summary of railway stocks.