Costco, the $250 billion wholesaler where families can buy everything from bulk food items to discounted gas now has another product that it would like to sell you: gold!
Yes, as of October 2023, Costco has started offering one-ounce 24-karat gold bars to members exclusively through its online platform. And the crazy part – every time they become available, they sell out within hours!
So what’s behind this latest craze for physical gold? Should you be adding a few bars to your cart the next time you buy something online from Costco?
Why is Costco Selling Gold Now?
Generally, when people think of gold bars (also known as bullion) that they can purchase, they imagine that it would come from an official mint, refinery, or dealer. However, Costco isn’t any of these things. They’re a large warehouse where people can find jumbo packages of toilet paper and peanut butter. So why are they getting into the gold game?
The answer is simple: demand. Ever since the COVID pandemic began in 2020, there’s been a renewed interest in gold. The economy quickly went into desperation as the world went into lockdown, and it’s been a bumpy ride from there. In response, investors will typically turn to gold for safety whenever there’s turbulence in the markets.
This is exactly what happened the last time gold peaked in July of 2011 at $1,837 per ounce. In the years leading up to this, the U.S. housing bubble burst and the economy plunged into the depths of the Great Recession.
Additionally, we also have the recent run-up of inflation. Compared to fiat currency (i.e., government-issued money), gold is viewed as a more reliable and universally appealing store of value. Therefore, even though interest rates may be high, investors will still look to gold as a way of hedging against rising costs and preserving their purchasing power.
Combine all that with the friction of politicians in Congress, and the answer is clear. Investors are fearful, and Costco is happy to sell them a remedy.
Does It Make Sense to Buy Costco Gold?
With so much demand for Costco gold, it’s easy to get caught up in the excitement and believe that this must be a good buy. This is a phenomenon that psychologists refer to as FOMO – fear of missing out.
However, high demand does not always mean good value. Therefore, the better approach is to slow down and think rationally.
As with any investment, the main factor that should drive your decision-making is what you believe the asset’s price will do next: go up or down. To say this another way, do you think you’ll be able to sell your gold for more than what you paid for it?
In the case of buying gold bullion from Costco, you’d already be at a disadvantage right from the start. As of October 4th, one ounce of gold was valued at around $1,835. Meanwhile, Costco was selling them for just under $2,000 each. Keep in mind that Costco also charges an annual membership fee just to be able to shop in their stores.
This delta in price could then become worse when you decide to sell your gold. Assuming the market value stays relatively stable, people with gold bullion generally have a hard time getting a fair sale price.
Since you can’t just exchange gold for money at a bank, you’d have to first find a party that’s interested in buying it such as a dealer, collector, or another investor. However, those people already know that they can buy newly minted gold at market price.
For this reason, you can expect that they’ll want you to give them a discount. That would result in a further loss of your principal investment.
Consequently, there are some other downsides to owning physical gold that few people realize until it’s too late. For instance, you now have to find some way of keeping it safe from theft. This might mean buying a high-quality safe or paying for a safety deposit box at the bank.
Additionally, you may want to consider taking out a separate insurance policy which then adds to the expense. Finally, when you go to sell it, you’ll have to be careful about how it gets transported and how the financial transaction is received (such as with an escrow service).
Other Ways to Invest in Gold
To address many of the problems that come with owning gold bullion, many investors will choose to instead buy shares of a gold ETF or similar asset. ETFs such as SPDR GOLD (ticker: GLD) track the market price of gold giving investors the opportunity to profit as its value goes up. You won’t actually own any physical gold. However, you’ll have far better liquidity and can sidestep all of the other hassles we already mentioned.
At the same time, most trading apps now let you buy fractional shares. This means you can invest as little as $10 or whatever amount you have available and own a portion of a share of a gold ETF. That’s much less risky than sinking a full $2,000 or more into one gold bar.
Along the same lines, there are also many ETFs and mutual funds that invest in precious metals. This is a broader group of commodities that includes gold and other desirables such as silver, copper, etc. Investing in this way helps shareholders to be better diversified given the demand for one metal versus the other.
Another way to reap the benefits of gold is to invest in the companies that mine and refine gold. Although these businesses won’t own the gold outright, they can prosper as the demand for the metal is rising.
The Bottom Line
Buying gold and other precious metals can be a healthy way to diversify your portfolio and hedge against falling markets and inflation. However, it is generally not advised to devote too much of your funds to this asset. Consider it a compliment to your core investment strategy that helps improve diversification.
If you do strongly feel that gold will rise in price over the next few years, then you’ll have decided for yourself if buying bullion is the right choice for you. Given that Costco is only selling gold in one-ounce bars, the high cost will be a barrier to entry for most households. A better alternative for your budget may be to consider a different financial product with better liquidity and lower investment minimums such as an ETF.
Featured image credit: Pexels
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