I recently made my monthly trip to Costco. I braved the crazed pre-Thanksgiving crowds to pick up my usual bargains: a giant bag of coffee beans, a four-pack of New York strip steaks, a case of kombucha (my favorite non-alcoholic drink), and a few other items the retailer sells in bulk at big discounts.
This time, however, I was in search of an extra special item: a gold bar.
If you weren’t aware, Costco sells 1-ounce gold bars and they’re flying off the shelves. I just checked the current price on the company’s website: $2,690.
In its September 2023 earnings call, the big box store revealed it sold more than $100 million in gold bars in its fiscal first quarter, which adds up to about 51,700 ounces of the precious metal.
But good luck getting one. Costco was out of them when I visited. And this week, I called my local store to check if they’ve restocked.
Nope. It’s still out of gold bars and doesn’t know when the next shipment will arrive. Last month, a store manager told me that when they do get a shipment, they all sell the same day.
It’s no wonder. Buying gold has become extremely popular since late 2022. You can see that by looking at its recent rally. It’s up 47% over the past two years and 22% so far this year.
As a result of its two-year rally, gold hit an all-time high a month ago. It came off that high in early November as investors pumped money into stocks during the post-election market rally, but it’s now rebounding again…
A Golden Insurance Policy
What’s odd about the current rally in gold is that most of it occurred as interest rates were rising, both in the U.S. and in other advanced economies.
Typically, the price of gold falls when rates rise. That’s because gold pays no interest and bonds do. So when rates are rising, investors want an asset that pays interest.
So what’s going on here?
Central Bank Buying
There’s an unusual factor at play in global gold markets right now…
After the Russian invasion of Ukraine in February 2022, the U.S. and several other Western governments froze Russian assets held in the West. That spooked Russia and other governments like China, and they began buying gold, which is a non-dollar asset that can’t be frozen.
So, several large central banks, including the People’s Bank of China and Russia’s central bank, among others, have been buying enormous amounts of gold to help them evade U.S. investment sanctions (Russia) or prepare for tariffs or trade wars with the U.S. (China).
Central bank purchases of gold have soared since 2022, according to the World Gold Council, to above 1,000 metric tons per year. In 2021 they collectively bought less than half that, about 425 metric tons.
And that brings us back to the tiny one-ounce gold bars at your local Costco. Consumers watched the price of gold rise due to all of the central bank hoarding, and they wanted in.
It’s worked out well for local gold buyers. A Costco gold bar purchased on January 1 of this year would be worth about $620 more today.
Gold is a special kind of asset. While it doesn’t pay interest or dividends, it tends to rise in value in times of national or global distress. So allocating a small amount of your portfolio to gold and other precious metals can be like an insurance policy to protect some of your wealth in times of crisis – particularly inflation, economic uncertainty, and global conflict.
That’s exactly why the Oxford Club’s Asset Allocation Model recommends investing 5% of your portfolio in gold.
Can this gold rally continue?
Well, two factors suggest it can.
Interest rates are now falling, which makes the yellow metal more attractive relative to interest-paying assets. And there doesn’t seem to be a slowdown in demand for gold from central banks around the world.
In fact, Goldman Sachs predicts the price of gold will hit $3,000 an ounce by the end of 2025. That would be about a 12% gain over one year, which is not bad for an asset that tends to rise when stocks and bonds fall in value.
The bottom line: it might be time to plan a Costco trip of your own in the near future…
But if your local warehouse is out of gold bars, as it most likely will be, you might consider what Karim Rahemtulla, Head Fundamental Tactician at our friends Monument Traders Alliance, has to say. Always the innovative investor, Karim has found a backdoor way to invest in gold at under $20 an ounce. It’s a great way to profit from gold’s big bull run.