“IN ALL MY EXPERIENCE, I HAVE NOT SEEN SUCH DYNAMIC PHYSICAL MARKETS AND WE SUPPORT DEVELOPING AND BROADENING OUT ACCESS TO NEW PRECIOUS METALS PARTICIPANTS.” MARWAN SHAKARCHI, CEO OF MKS PAMP
There have been a few times in market history when a structural game-changing event occurs. Even then, it can be difficult to spot these events while they’re happening. The perspective of hindsight often clarifies things, gifting market analysts that ‘aha’ moment.
We witnessed the (bearish) effect of the Volkswagen ‘dieselgate’ scandal in 2015 on structural platinum demand and the (bullish) effect of the advent of the Gold ETF in 2004 in expanding access and participation in gold. With the systemic outflows in gold ETF holdings in the past three years, the industry is searching for new products to fill the void, such as a next-generation ETF with the right disruptive features. Could the next GLD event already be well underway – in the form of the “Costco effect”?
History and Media Coverage
Costco started selling 1oz gold bars to consumers in the second quarter of 2023. In a December earnings call, the Costco CFO noted that in the third quarter (Q3) of 2023, the gold bars typically sold out “within a few hours” after being posted online. Costco sold $100 million worth of gold in Q3 2023. Wells Fargo estimates the store is now selling $200 million worth of gold bars per month.
The rest is history. Media coverage has since exploded, with featured articles in CNBC, NYT, FoxBusiness and Axios (to name a few), and a segment on Good Morning America (GMA) bringing inflation fears and gold bars into Americans’ living rooms.
Food Inflation and Gold
The timing – heading into a tense US election year where people are fearful of inflation and growing economic uncertainty – is key. Politicians and economists say that inflation has fallen from 9% to 3%, but consumers don’t feel that way. Prices are still going up, just at a slower rate.
A recent analysis found that a commonly purchased basket of supermarket goods had increased by 36% over the past four years (+8%/year), which is much higher than US Government CPI figures, which show food price inflation of 25%. There is no simpler (or more primal) way to feel inflation than the impact it has on everyday household items such as groceries.
And now consumers can purchase the traditional inflation hedge at their local Costco.
New Fears for a New Generation
Inflation is not the only driver of gold buying. A WSJ article highlighted that young investors are buying gold as a hedge against catastrophe. New customers into gold continues to be very strong; for example, this measure is 30%+ higher versus 2019 for APMEX. It doesn’t matter whether gold is a reliable hedge against doomsday scenarios or not; it matters that the consumer believes it is… Millennials, (yes, not the typical US retail gold investor) are internalising new fears – COVID, climate change, inflation, far right politics – and utilising the old-school store of value as a hedge.
Costco is where “the people” shop and that typical cohort puts a great deal of value in trust – trust in the US’s economic, social and political institutions. The graph below highlights that America’s confidence in its institutions is at an all-time low across the board – which can be read as: “the people’s” confidence in the US’s ability to destroy itself over time is at an all-time high and they are seeking a more traditional escape (in assets such as gold) via traditional outlets (such as Costco).
The timing – heading into a tense US election year where people are fearful of inflation and growing economic uncertainty – is key
Emblematic of Global Physical Trends
What is notable is that the Costco gold-buying trend is occurring when gold is consistently at all-time highs.
There’s a worldwide and growing appetite for physical (less so paper) gold, indicated by the regional premiums in Thailand, the Middle East and even China. The lack of secondary material, as physical holders retain holdings unlike during past gold supercycles, is exacerbating regional premiums. Physical retail demand in the West is lagging behind well-entrenched trends in the East, because of
tame financial market volatility and somewhat of a Goldilocks economic backdrop. But the trend in Costco gold buying is an indication of a catch-up trend.
A stale (2020) but still relevant World Gold Council research report found that 41% of Americans are considering buying gold but have not purchased, with various barriers to entry including trust, education, ESG, etc. Costco solves all of these, plus gold purchases are being incentivised by an attractive rewards programme. There is a 2% cash back (yes, cash, not points!) on all purchases for exclusive Costco members, which is helping to drive and expand gold bar demand.
In the US, approximately 50% of purchases are on credit card (“it’s the (credit card) economy stupid”), where younger generations have grown up in this reward culture thinking that “one needs to spend money to make money”. Overall, the Costco gold-buying trend (as it overcomes inefficiencies in the bullion market) is pulling new investors into the physical precious metals space, which is mirroring persistent buying trends in other regional hubs.
Missing Participants from Gold’s Rally
The quiet and rather measured rally in gold and the less quiet rally in silver, in which neither has burnt itself out, are missing participation from two major players: ETFs and Western retail (coin/bar) demand.
While consumers are snapping up bars at Costco, subdued coin premiums and early estimates (US Mint gold coin sales were down 25% in Q1 2024; and Perth Mint gold sales hit their lowest in five years in March 2024) indicate aggregate retail demand in the US and Western Europe is sluggish.
Two-way markets are also driving demand; it’s increasingly a closed loop market, with secondary product (buybacks) coming back and giving an artificial view of subdued mint sales volumes. Since gold has breached the important psychological $2,000 handle, real rates remain positive and equities have been performing during the past few months, this cohort of Western investors has not caught the gold and silver fever (yet?!). Cumulative Global ETF and Americas + European Coin/Bar Demand stood at only 8 tonnes in 2023, the lowest since 2013.
A resurgence from these participants, as the Fed enters a rate-cutting cycle, is the differentiator between $2,300 vs $2,500+ for gold and between $28 vs $35 for silver. ‘The Costco effect’ and its subsequent effect on sentiment and market access only helps.
S&Ds are not Insignificant
How big, fundamentally, can the Costco gold buying get? The Economist recently pointed out that the current monthly Costco gold demand trend is around half of what the PBOC has lapped up in March alone – 160 Koz. Neither trend is insignificant. And while the estimated $200 million per month of sales equates to less than 1% of annual gold demand, as of November 2023, there were 130 million Costco members. With a 5oz gold cap applied to bar purchases, that equates to 640 Moz of gold (versus just 4 Moz in 2023 for US coin and bar gold demand), if every member purchased.
The disconnect between actual demand and supply (for bars) would be better reflected in much higher premiums and less so in the flat price, given the sheer size of the gold market. Overall, it’s hardly about actual ounces and the impact on gold’s supply/demand balance sheet. Gold does not trade as a true commodity in that sense.
What matters is sentiment, flows and, importantly, market access.
Sentiment will Broaden Access
The Costco gold and subsequent media boom has already punched above its raw (fundamental) weight in influencing opinion; it alone is putting gold as an asset class back on the map for new (that’s
the key word here) retail investors.
It heralds a regime shift in market dynamics and structure, especially in the bullion world, where the average Joe (and Jane) can easily scoop up a $2,000+ 1oz PAMP gold bar or a tube of 1oz Silver Eagles.
An expanded participant pool is always bullish and we sometimes cannot see the forest for the trees here. Game-changing market moments come and go. Some are just well timed, coincidentally or not. GLD was developed a couple years after 9/11 and at the start of zero interest rates, easily creating a bigger path for investors to access the metal. Costco has done more for sentiment and opening new channels when trust has completely broken down post COVID. Aha – it’s not quite the next GLD event, but this time it’s much more than a trade.
