Once best known for the best retail prices in all the land, Costco is now offering its members the opportunity to buy into one of the oldest investments known to man—Gold. The offering is not some one-off novelty item either, Costco has been selling customers one-ounce bars of 24-karat gold since last October. Priced at around $2,000 each, Wells Fargo estimates that the company’s gold sales bring in between $100 million to $200 million each month.
From national fiscal policy to international politics, there are two key drivers of the current high demand for gold. For one, there is a section of the market buying goal in the expectation that the Federal Reserve will be slashing interest rates. Historically speaking, gold has always been viewed as an investment resilient to such market volatility. When interest rates fall, the potential income from investment tools such as bonds falls as well, which motivates investors to hold the value of their wealth in something relatively stable. Gold’s value is typically inversely connected to the interest rate. Gold is also held as a commodity investment against inflation—a haven during periods of economic or international instability.
The other primary driver of change is the central banks of several different countries – mainly China. These countries are currently buying up gold in the international markets as a way of relaxing their reliance on the US dollar. In March alone, China bought up 160,000 ounces of gold, bringing their reserves up to 72.74 million troy ounces of gold. Additionally, countries like India and Turkey are also steadily increasing their gold reserves, driven partly by geopolitical uncertainties in their region. These countries are also driven by a desire to diversify their wealth away from the US dollar.
Inflation is one of the key reasons that retail investors across the US are buying up Costco’s gold bars. The price of gold has always risen year on year – it is currently $350 US from the same time last year – and 10X more than its price in 2000. However, the value of gold is not always guaranteed and its price has been known to swing significantly over a few years. At a time when inflation rates in general – and in relation to specific products such as housing – are hitting record highs, people also like to have something tangible to hold onto while the value of money decreases dramatically. It’s also relatively easy to reconcile the spend in the minds of those making the purchase, given that it just feels like they are exchanging one currency for another.
In Costco’s case, while it appears as if gold sales are making it money, the Wells Fargo equity report notes that the profits from these sales are low. Costco is currently pricing the gold at about 2% above spot prices to card-carrying members, with a 2% cash-back offer for executive members. Those with a Citi card get a further 2% cash back reward. Apparently, the company’s motives in pursuing gold sales are due to how space reinforces Costco’s value position in the market. Online commentary on platforms such as Reddit and TikTok on meeting current financial constraints is also promoting gold sales, acting as indirect advertising for Costco. This is a key value driver for Costco, which rarely spends on advertising or public representation, relying instead on word of mouth. Costco is currently implementing a two-bar per Costco membership limitation, presumably to prevent people from stockpiling in earnest. Purchasing a gold bar from Costco is also increasingly turning into a ‘must-do’ for trend followers, serving as a collector’s item to be shared across their own social plages.
While jewellery is one of the most popular categories in the general merchandise category for Costco, it can hardly be related to its current popularity in the precious metals category. Since this March, Costco has also launched the sales of silver coins as well. Much like the gold bars, these silver coins are only available for sale on the company’s website. Since its launch as a pack of 25 one-ounce silver coins priced at $625, the silver is currently sold out completely. However, it appears as if silver is currently undergoing some logistics issues. According to customer reviews, silver customers complain of the condition the silver is shipped. These complaints state that some silver cases have arrived at their destinations unsealed, where some coins had fallen out and got damaged. Once restocked, customers can purchase five cases of coins per membership card. As of now, Costco does not offer a return or a refund option for silver purchases.
(Theruni Liyanage)