ANALYSIS: Buyers Snapping Up Costco’s Gold Bars Signals Growing Economic Anxiety, Shift Toward Hard Assets

A worker polishes gold bullion bars at the ABC Refinery in Sydney, Australia, on Aug. 5, 2020. David Gray/AFP via Getty Images

For some economists, the decision of retailer Costco to begin selling one-ounce gold bars is a puzzling one, given that the precious metal’s role in the global economy has been on the downtrend for several decades.

Mario Seccareccia, an economics professor at the University of Ottawa, told The Epoch Times that he doesn’t think it’s a wise decision for people to be buying the gold bars.

“Given the whole context of the world right now and the global realignment, people have a lot of fears, and they’re going to express it in different ways. This, to me, is not the intelligent way,” he said, adding that “these anxieties are not going to be solved by holding gold in your ... backyard or somewhere.”

However, other economists view the decision to invest in gold as a sensible and rational strategy to protect against inflation using a hard asset that has demonstrated its resilience over time, especially as countries like China and Russia continue increasing their gold reserves.

“In terms of an economic decision, the way one should think about having gold as an asset is it’s pretty stable and it’s sort of a hedge against market volatility,” said John Ries, professor of HSBC Professorship in Asia Business at the University of British Columbia.

“So I think governments hold it for that reason, and I think individuals also feel that it’s valuable to buy a gold bar from Costco and hide it away. It’s probably going to retain its value and be worth more when you come to sell it.”

‘Casino-Type Economy’

In late September, Costco began selling one-ounce, 24-karat gold bars from two suppliers on its website—South Africa’s Rand Refinery and Switzerland’s PAMP Suisse—for around US$1,949 and US$1,979 respectively. The Suisse bars are on sale at Costco in Canada for C$2,679.99 a piece.

According to Costco Executive VP and CFO Richard Galanti, the items have been a big hit. “When we load them on the site, they’re typically gone within a few hours, and we limit two per member,” he said during a recent earnings call.

Gold has long been seen as a “hedge” against inflation, as it’s been used as a store of value for thousands of years, has real-world uses in electronics and jewelry, and has a limited supply.

“That’s the usual selling point, that people buy gold because God knows what will happen to other things, and you want to hang onto this for the purposes of securing a value that is fixed over time,” said Mr. Seccareccia.

However, he believes the option to purchase gold is just “one more instrument” for high-income individuals to participate in a “casino-type economy where you speculate on all kinds of things.”

Mr. Seccareccia also challenged the idea that gold is a reliable inflation hedge, pointing out that since countries abandoned the gold standard in the 1970s, the price of gold compared to the Consumer Price Index has continually fluctuated. He suggests Canada Savings Bonds would be a better choice to hedge against inflation, since the Bank of Canada will raise interest rates to tame inflation, which will also increase their value.

“In a sense, we have a government, through its central bank, almost guaranteeing you a better deal than gold,” Mr. Seccareccia said. “It’s inflation-proof—not completely, as we’ve seen, but as you can see that since last year, [the Bank of Canada] has been raising interest rates a great deal as the inflation rate went up.”

Russia and China Buying Gold

Mr. Ries said that while there is a “novelty aspect” to holding physical gold bars, the belief that gold is a stable and reliable hedge against market volatility makes it “logical” for individuals as well as central banks to hold the precious metal.

“I can see why people who are nervous about the global economy might choose to hold gold,” he said.

Mr. Ries said many of his colleagues in finance feel the same way about precious metals. He cited a recent International Monetary Fund working paper co-authored by Barry J. Eichengreen, a professor of economics and political science at the University of California, Berkeley, which showed that many countries have chosen to buy gold as opposed to diversifying economics by purchasing foreign reserves.

Titled “Gold as International Reserves: A Barbarous Relic No More?” the paper says gold is seen by bank reserve managers as a “safe haven in periods of economic, financial and geopolitical volatility” when there is a low return on alternative financial assets. It also said financial sanctions by reserve currency-issuing economies like the United States, UK, and EU have driven some countries to purchase gold.

Gold has recently become a preferred investment alternative in China, with it being seen as a hedge against financial volatility in the face of the Chinese yuan losing its value against the U.S. dollar. The People’s Bank of China has diversified its reserves with gold, purchasing 1,448 tonnes of gold between 2002 and 2019 and continuing to do so in 2023.

Russia, which has faced heavy economic sanctions since its invasion of Ukraine in February 2022, resumed buying gold at that time after a two-year pause. The Kremlin purchased one million ounces (31 tonnes) of the metal in the span of a year following the invasion, while also changing its income tax rules in 2022 to incentivize its citizens to purchase gold.

Bao Anh Nguyen, a professor at the Faculty of Social Sciences and Economics at the University of Ottawa, said that BRICS, the economic bloc of developing economies that include Brazil, Russia, India, China, and South Africa, has a plan to introduce a new gold-backed currency. He said that by purchasing gold, the countries are diversifying their currency reserves, ensuring stability in the face of economic uncertainty and challenging the dominance of the U.S. dollar.

“It underscores the ongoing shift in the global economic landscape and raises questions about the future role of traditional reserve currencies like the U.S. dollar,” Mr. Ngyugen told The Epoch Times.

“It will be essential to closely monitor the actions and policies of these nations and how they navigate the complexities of buying gold to create and adopt a new international currency backed by gold.”

‘Remarkably Innovative’

Mr. Nguyen said that while Costco’s decision to offer gold is “quite surprising,” it’s also “remarkably innovative” from a business perspective. He said Costco’s move to sell the one-ounce bars for C$2,679.99 has the potential to be quite lucrative, because with the price of gold at around C$2507.55 at the time of the interview, Costco’s profit margin would be around 6.9 percent.

He added that there is a “complex and sometimes contradictory relationship between inflation and gold prices” that doesn’t always move in the right direction. In his 2021 paper titled “Half Century of Gold Price: Regime-Switching and Forecasting Framework,” he found that different countries’ economic systems can have varying effects on the price of gold.

“When there is a high demand for gold as a store of value during inflationary periods, it drives up the price. However, in situations where the price of gold is already high, high interest rates during inflation can incentivize individuals to sell their gold and deposit cash in savings accounts, causing gold prices to decline,” Mr. Nguyen said.

However, he said he believes Canada should consider the “repurchasing and reintroducing” of gold into its national reserves. Throughout 2015 and in early 2016, Canada sold off most of its remaining gold reserves, mainly by selling gold coins, CBC News reported in February 2016. During most of 2015, Canada had more than US$100 million in gold reserves. By early February 2016, it held only around US$19 million worth of gold.

Canada is now the only G7 nation that does not hold at least 100 tonnes of gold in its official reserves, based on June 2023 figures. In fact, it holds less than one tonne.

“Naturally, the timing and quantity of such acquisitions should be carefully determined through a comprehensive strategic plan,” Mr. Nguyen added.

Shift to Hard Assets

Canada’s Finance Department told CBC in February 2016 that the decision to sell off Canada’s gold reserves was part of a “long-standing policy of diversifying its portfolio by selling physical commodities (such as gold) and instead investing in financial assets that are easily tradable and that have deep markets of buyers and sellers.”

Kevin Page, Canada’s first Parliamentary Budget Officer, agreed that unloading the country’s gold reserves “did not seem like a big issue to me at the time,“ and said that Canada did not need to hold the precious metal because ”the days of currencies backed by gold are passed.”

“It is not as liquid as the American dollar. In a crisis, if the Bank of Canada needs to intervene in foreign exchange markets, liquidity and deep markets are most important,” he told the Western Standard in April 2022.

But Joseph Barbuto, director of research at the Economic LongWave Research Group, has a different view of that decision. He said that since many people have become concerned about rising inflation and the possibility of governments defaulting on their debts, they’ve chosen to shift to hard assets like gold, silver, crypto, and real estate.

Gold has been used as a unit of exchange throughout history, Mr. Barbuto said, and one can “bring a gold bar and trade it for everything of value anywhere in the world.” He said this is why China, which he believes will be the economic centre of the world within the next two decades, has been stocking up on gold.

Mr. Barbuto, who also predicts there will be an “economic winter” similar to the crashes of 1873 and 1929, said there is always an “overconfidence in the ability of governments to control the economy during the ‘autumn’ part of the economic cycle.”

“So they‘ll all look like fools at the end of this, and they’ll be probably buying gold at the peak when everybody’s panicking,” he said.