Why Costco gold is a terrible investment and what to buy instead

The popular retailer Costco, which currently sells gold ingots to its millions of club members, is flying off the shelves, the company said. But while shiny yellow metal may make a great conversation piece or interesting piece of art, it’s a pretty terrible investment.

Here’s a breakdown of the Costco deal and what legendary investors say you should buy instead. We will also explain the best way to buy gold.

3 reasons why Costco gold is a bad investment

Costco sells gold ingots (actually two varieties) for $2,070 (as of mid-December). Much of the financial press uses the term “bar” to describe gold, which conjures images of Hollywood madmen with brick-sized chunks of shiny stuff, but here we use the term “ingot.” may be appropriate. For a few thousand dollars, you’re buying every ounce of gold that can easily fit in your hand.

The company only sells its ingots online rather than in stores, certainly considering the risks to both customers and itself of transferring so much value to a small item. Despite this, the company says it sells out within hours of posting or re-posting ingots for sale.

Unsurprisingly, Costco’s strong reputation makes it easy for those on the fence about purchasing gold. Retailers are promising fixed price increases, and consumers may even be able to take advantage of cashback credit cards to save a few percent off the price of gold ingots.

However, despite a solid buying experience, gold is a bad investment for a variety of key reasons.

1. It may be impossible to obtain fair value

When you’re dealing in physical bullion, it’s difficult to avoid being pursued by the dealers you buy and sell from. Gold dealers are not risking money to have fun, so they have to build their own price margins. This means you pay more than the spot price of gold when you buy it, and receive less when you sell it. Just like when you sell your old car to a car dealer, the dealer isn’t just buying the car to use, they’re accumulating future profits for the next buyer.

“In this event that has garnered a lot of attention, the two companies that are probably most likely to generate positive returns are the gold sellers to Costco and Costco itself,” said Mark Hamrick, senior economic analyst at Bankrate. talk.

Every time you enter or exit the physical gold market, you end up paying a hefty “spread markup” for the privilege, which gets clipped on both sides of the trade.

That spread is clear when you look at Costco’s pricing. With the spot price of gold in mid-December at $2,018, the price of the company’s gold ingots is about 3 percent higher than the market-determined fair value of gold. But at the end of last year, the spread had risen by as much as 7.3%. And when you sell your gold, you’ll probably have to settle for a similar or higher discount.

It is better to do business with a reputable bullion dealer than with a pawn shop. There is no need to rush to sell as the final realized price also tends to be lower.

People are understandably upset when they pay similarly high fees in other situations, such as 5-6 percent when selling a home. The problem is that commissions on major investment products such as stocks, ETFs, and mutual funds have been reduced to zero. If you want to know how to get a fair value for your gold, keep reading below.

2. Gold returns will be lackluster over time

If you’re buying gold in hopes of getting rich, stop today. Over the long term, gold returns pale in comparison to the returns of stocks and equity funds. While gold may outperform in the long run, stocks have performed very well. The numbers are:

Below are key performance numbers for two prominent ETFs. One is SPDR Gold Shares (GLD), which holds physical gold, and the other is Vanguard S&P 500 ETF (VOO), which tracks the Standard & Poor’s 500 index, the largest U.S. index.

In all time periods cited, S&P 500 index funds have outperformed gold funds, which are established to track the price of gold by actually owning physical bullion. In other words, it’s not a security with a fancy gimmick, owning something that’s supposed to move like gold.

And since anything from Beanie Babies to baseball cards to cryptocurrencies can outperform in the short term, what we’re really looking for is long-term returns. Based on this, the S&P 500 index fund has an average annual return of 13.9 percent over 15 years, compared to 5.4 percent for the gold fund.

The problem is, when you calculate what this means in real dollar terms, the difference becomes even more pronounced. If he invests $10,000 in each fund and holds it for 15 years, the amount he will have before taxes is:

• SPDR Gold Share – $22,009

• Vanguard S&P 500 ETF – $70,446

This is a huge difference, and you are giving it up by buying physical gold. But to make it more fair to own physical gold yourself (rather than just through a fund), you’ll need to deduct a fee (perhaps 10 percent) from the total amount, further reducing your profits.

If you run the same calculations over a 10-year period, gold would do even worse. This is not to take anything away from the SPDR Fund. I will praise this in the next section.

3. Money must be kept safe

Unlike other investments such as stocks and ETFs, gold must be stored safely and insured if purchased in large quantities. In extreme situations, it can cost a lot of money. But even if you only have a novelty gold ingot, you need to be careful that thieves don’t steal your gold and your entire investment right away. So it’s not just something that’s lying around.

“My concern for those who view gold bars as more than expensive collectibles is that gold bars are subject to actual loss, theft, and even price increases. You’re putting your costs at risk,” says Hamrick.

Of course, just like jewelry, part of the fun of owning gold bullion is admiring its brilliance and showing it off to others. Even if it’s a questionable investment, it’s a fun novelty. What a shame, then, that its value is too scary to display, and may even be hidden away.

Still, if you don’t keep your gold safe, it could end up being stolen.

How to invest in gold and what to buy instead

For the reasons mentioned above, buying physical gold is not very attractive as an investment. However, if you are absolutely interested in investing in gold, there are investment options that eliminate some of the drawbacks of buying bullion. SPDR Gold Share.

Yes, if you want to bet on the price of gold rising, a better option is to buy a fund that owns physical gold. Fund price appreciation tracks commodity appreciation, minus the Fund’s expense ratio of 0.4 percent, which is seamlessly deducted from the Fund.

Purchasing this type of gold fund eliminates the difficulty of obtaining fair value for gold as you can buy and sell the fund at fair market value without additional brokerage fees. Additionally, you don’t have to pay out of pocket to keep your gold safe, but you’re probably doing it implicitly through the fund’s expense ratio, although it’s pretty low. (Plus, there are other investments in gold that can be won in different ways.)

But gold funds alone cannot solve the key problem of gold’s below-average returns. That’s why legendary investor Warren Buffett has long advocated owning stocks in highly productive businesses rather than owning yellow metal dug out of the ground.

In a 2011 letter to shareholders of his company, Berkshire Hathaway, Buffett said, “What motivates most gold buyers is the belief that there will be a growing fearful population.” Ta. “On the other hand, if you own an ounce of gold forever, you own an ounce of gold until the end.”

Buffett advises individual investors to buy stocks in S&P 500 index funds and increase their holdings over time. By purchasing and holding the S&P 500 Index His Fund, investors can enjoy the returns of the index without any professional investment knowledge. This approach makes this type of fund very accessible even to novice investors looking for high returns.

Here we will explain how to purchase the S&P 500 index fund and what to keep in mind.

conclusion

Those looking to earn attractive profits from Costco’s gold ingot sales should carefully understand the downsides of investing in physical gold. Investing in the S&P 500 index provides much better returns over the long term and also provides investors with the power of diversification.

Editorial Disclaimer: All investors are encouraged to conduct their own independent research on any investment strategy before making any investment decisions. Additionally, investors should note that past performance of an investment product does not guarantee future price appreciation.