Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / Why Stagflation Is Making Gold Miners the New Bond Hedge
Transcript
- Lucas: So gold is at forty-four hundred dollars an ounce, and the miners are up eighteen percent in five days. That's not a typo. Luna: Eighteen percent in a week? That's more like a meme stock than a boring old materials sector. Lucas: Right, and that's exactly what I want to dig into today. When you see that kind of move, it's worth asking what the market thinks it knows. Because in a stagflation environment, gold miners have historically been the purest play on inflation without the interest-rate risk of long bonds. Luna: But wait, the ten-year breakeven inflation rate actually ticked down to two point two five percent last week. So why are miners screaming higher if inflation expectations are cooling? Lucas: That's the puzzle. And the answer, I think, starts with what gold itself has done. Spot gold is up over seven percent in the last five days alone. When the metal moves that hard, the miners tend to move two to three times as much, because their costs are largely fixed in dollar terms while their revenue tracks the gold price. Luna: So it's operating leverage. A ten percent gain in gold can translate to a thirty percent gain in earnings per share for a miner. Lucas: Exactly. And that's why the gold miners ETF, GLD, is up seven percent, but the actual miners fund, GDX, is up eighteen percent. The market isn't just pricing in higher gold — it's pricing in a lot of operating leverage on top of it. Luna: But is that justified? I mean, gold is up because people worry about the economy, right? And in a real downturn, miners still have to pay wages, maintain equipment, service debt. Lucas: Sure, but here's the thing: the biggest miners have spent the last five years paying down debt and returning cash to shareholders. Barrick and Newmont, for instance, are nowhere near the leveraged balance sheets they had in the 2010s. So the fear of a margin squeeze isn't what it used to be. Luna: So you're saying these are more resilient companies than the ones that blew up in the last gold bust. Lucas: Precisely. And that's a really important difference from the 1970s. Back then, gold miners were often high-cost producers with thin margins. Today, the average all-in sustaining cost for a major is around thirteen hundred dollars an ounce. At forty-four hundred, that's a gross margin of over seventy percent. Luna: Seventy percent gross margin on gold. That's not a hedge, that's a cash machine. Lucas: Right. And that's why the market is piling in. But I want to be careful not to sound like a gold bug. There are real risks here, and the biggest one is that gold is a sentiment asset. It doesn't pay a dividend, it doesn't generate earnings, it just sits there. Miners at least have operating cash flow, but they're still tied to that sentiment. Luna: And sentiment can turn fast. Especially if the Fed decides to actually get serious about inflation and hikes rates hard enough to break the economy. Lucas: Right. But here's the interesting thing about this current moment. Real GDP growth came in at one point five percent annualized for the second quarter, and the July jobs report actually showed a loss of twenty-three thousand jobs. That's the stagflation mix — slow growth, but inflation that's still above the Fed's target. In that environment, real interest rates stay low, and that's historically been the sweet spot for gold. Luna: So gold thrives when growth is weak and inflation is sticky. And that's exactly where we are. Lucas: Exactly. And that's why I think the miners' move isn't just a knee-jerk reaction. It's a bet that the Fed can't raise rates enough to crush inflation without tipping the economy into recession. And if that's the bet, gold and gold miners become the trade. Luna: But hold on — the unemployment rate actually fell to four point one percent in July, and that's not exactly a recession signal. How do you square that with the job losses? Lucas: That's the weird part. The unemployment rate fell because the labor force participation rate dropped. People left the workforce entirely. So it's not that the labor market is strong — it's that the measuring stick has fewer people on it. That's a sign of distress, not health. Luna: Okay, so we've got a labor market that's softening, inflation that's still above target, and gold miners surging. What does this say about the broader stock market? Lucas: Well, the S&P 500 is up two percent on the week, and the NASDAQ is up three percent. So risk appetite is still there. But the fact that miners are outperforming the tech-heavy NASDAQ by fifteen percentage points tells me that investors are hedging their bets. They're not all-in on a soft landing. Luna: It's like they're buying the rally but also buying insurance against it failing. Lucas: Exactly. And you know, it's funny because a lot of investors treat gold miners as a barbaric relic, but they're actually one of the few asset classes that can perform well in both high inflation and economic turmoil. The question is whether that performance is sustainable or just a crowded trade. Luna: I mean, how crowded is it? The gold miners ETF is up eighteen percent in a week — that's not exactly a stealth move. Lucas: Right, and that's a fair concern. But even with that move, the sector is still well below its 2011 highs in real terms. And the fundamentals are stronger now. So it's not like we're in a bubble. It's more of a repricing. Luna: Let's talk about one of those fundamentals — capital discipline. Because I remember in the last gold boom, miners were blowing cash on acquisitions and building projects that never made sense. Lucas: Yeah, that was the 2010s problem. They spent billions on deals and then gold crashed, and they were left with impairments and debt. But this cycle is different. The big miners have been incredibly disciplined. They're not chasing growth for growth's sake. They're returning cash to shareholders through dividends and buybacks. And they're keeping production costs low. Luna: So if gold stays at these levels, their earnings are going to be massive. And if gold pulls back, they're still profitable because their costs are so low. Lucas: That's the asymmetry that makes them interesting. You've got downside protection from low costs and upside leverage from the gold price. That's a pretty good risk-reward profile in a stagflation environment. Luna: But there's also the geopolitical risk. A lot of the best gold deposits are in places like Russia, South Africa, or parts of West Africa. That's not exactly political stability. Lucas: True, but the majors have diversified away from the most volatile regions. Barrick and Newmont have assets in North America, Australia, and other relatively stable jurisdictions. That doesn't eliminate the risk, but it mitigates it. Luna: So what would make you change your mind? What could turn this from a smart hedge into a value trap? Lucas: The big one is if the Fed somehow manages to engineer a soft landing — inflation comes down to two percent while the economy keeps growing. In that scenario, real rates would rise, gold would likely fade, and miners would give back some gains. But that's a pretty optimistic scenario given the current data. Luna: And looking at that July jobs report, a soft landing seems like a long shot. Lucas: Exactly. And that's why I think the market is right to be paying attention to gold miners. They're not a sure thing, but they're one of the few positions that makes sense when the economy is slowing and inflation is sticky. Luna: You know, this conversation reminds me of why I love this show. It's like walking through the economy with a friend who actually understands the numbers. And that's kind of rare. Lucas: Well, that's the goal. And if you've gotten something out of these conversations, you know what keeps us going — a couple of dollars a month, buy me a coffee dot com slash fexingo. It genuinely makes a difference, and it keeps the show free for everyone. Luna: Yeah, we don't have a huge corporate machine behind us. It's just us, and every little bit helps. Lucas: Anyway, back to the miners. So if you're thinking about adding exposure, you've got a few options. You can buy individual stocks like Barrick or Newmont, or you can buy an ETF like GDX for broader diversification. Each has its own risk profile. Luna: And what about the smaller miners? The juniors are even more leveraged to gold, but they're also riskier. Lucas: Right. Juniors can double or halve in a month. They're not for the faint of heart. But for investors who believe gold has further to run, they offer the highest beta. Just make sure you size your position accordingly. Luna: So what's your takeaway for the listener? If someone wants to hedge against stagflation, should they buy gold miners or just stick with the metal itself? Lucas: I'd say it depends on your risk tolerance. If you want a pure hedge, gold itself is simpler. But if you're willing to accept more volatility for the potential of higher returns, miners are the way to go. And as we've seen this week, when the trade works, it works big. Luna: Given the eighteen percent move in GDX, it seems like a lot of investors have already made that bet. Is there any room left? Lucas: That's always the question. But even after this run, the miners are trading at reasonable valuations relative to their earnings power. And with gold at forty-four hundred, their cash flows are enormous. I think there's still upside, but it won't be a straight line. Expect volatility. Luna: And that's the thing about stagflation — it's not just one move, it's a grind. But the miners seem well-positioned for that grind. Lucas: Yeah, I think that's a fair summary. Gold miners aren't the new bond hedge — they're the old one, back in fashion because the conditions call for it. And as long as GDP growth stays weak and inflation stays sticky, they deserve a place in your portfolio.