Retail gold demand drives $100 to $200 million in sales for Costco

(Kitco News) - The gold market has been acutely aware of lackluster demand from generalist investors for a while; however, investors are mostly shunning paper gold products as major retail has seen significant growth in physical bullion sales.

Last year, Costco surprised the investment community after it announced it sold $100 million in one-ounce gold bars between August and September. Equity analysts at Wells Fargo said that investors should start paying attention to the retailer’s gold business, as it has helped drive momentum of online sales.

The analysts expect that Costco’s gold sales have only grown since its third-quarter announcement.

“We est. sales may now be running at $100-200m per month, which would add almost 1% to total comps, slightly more to US comps, and about 3% to gen. merch. Sales,” the equity analysts said in their report published Tuesday.

Wells Fargo analysts noted that while its bullion sales are helping to drive online sales, it’s probably not adding much to the company’s bottom line.

“The company prices the product attractively, providing members gold at ~2% above spot prices before a 2% cash back reward for executive members and another 2% in cash back for those with the Citi card. That being said, pricing at that level and shipping costs suggests it’s a very low profit business at best,” the analysts said.

However, the value for the company comes from the exposure it has received. There are social media posts on Reddit that are dedicated to Costco’s gold bullion.

Gold has attracted a lot more attention in recent months as prices have soared to record highs. The precious metal has hit record daily highs in the last eight consecutive trading sessions, peaking Tuesday at $2,384.50 an ounce.

Costco’s robust sales estimates buck the trend in the marketplace. The U.S. Mint reported relatively lackluster demand for its bullion coins since the start of the year.  According to its sales stats, the U.S. Mint sold 12,000 ounces of gold in various denominations in American Eagle Gold coins last month.

While official mint sales have struggled this year, analysts note that the physical over-the-counter market has seen solid demand, as evidenced by physical outflows in holdings in London commercial vaults.

At the same time, while Western investors have largely ignored gold, Asian investors, specifically in China, continue to dominate the market. Analysts at BMO Capital Markets noted that turnover on the Shanghai Gold Exchange hit a two-year high at the start of the week, even as prices trade near record highs.

Some analysts have said that holding physical gold is more attractive than paper assets in an environment of heightened global geopolitical uncertainty and stubborn inflation.