Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / Why Stagflation Is Boosting Gold Mining Stocks
Transcript
- Lucas: Gold is trading above $4,300 an ounce as of this morning, and the gold miners ETF — ticker G-D-X — has rallied over 18 percent in just the last five trading days. That's a massive move, even by precious metals standards. Luna: Eighteen percent in a week? That's not a drift — that's a stampede. What's driving it? Lucas: The short answer is that the market is pricing in a prolonged stagflation scenario. Gold itself is up about 3 percent this week, so miners are amplifying that move by a factor of six. That's operating leverage in action. Luna: Right — when gold prices rise, mining companies' revenues go up, but their fixed costs don't move much, so profits can surge disproportionately. But is that enough to explain an 18 percent weekly rally? Lucas: Not entirely. Look at the macro backdrop. The latest CPI print, for May, came in at 334.0 — that's up from 332.41 the month before. Core CPI is still creeping higher. Meanwhile, real GDP growth annualized is just 1.6 percent, and unemployment is stuck at 4.3 percent. So you've got persistent inflation and sluggish growth — textbook stagflation. Luna: And in that environment, gold traditionally shines as a store of value. But miners have been underperforming gold for much of the past year. Why the sudden catch-up? Lucas: A couple of things. First, the ten-year breakeven inflation rate has dipped slightly to 2.29 percent, which suggests that nominal yields are falling faster than inflation expectations. That pushes real rates lower, and lower real rates are a huge tailwind for gold and gold miners. Luna: So falling real rates make gold more attractive relative to bonds. And miners benefit even more because their profits are tied to the gold price, not just the spot price of the metal. Lucas: Exactly. And there's a second factor: energy costs. Mining is energy-intensive. The latest PPI data showed wholesale prices rose 1.1 percent in May, driven by a surge in energy. That squeezes margins for miners. But if gold prices rise faster than energy costs — which they are right now — then margins expand. Luna: So the market is betting that gold will keep outpacing input cost inflation. That's a pretty bullish bet on continued stagflation. Lucas: It is. And if you look at the 1970s playbook, gold miners were some of the best performers during the worst of the stagflation years. From 1973 to 1980, the gold price went from about $100 to $850 an ounce. Mining stocks multiplied many times over. Luna: But not every miner survived that period. Some took on too much debt or hedged away their upside. Are today's miners better positioned? Lucas: Generally, yes. The industry has been disciplined about balance sheets. Many of the large-cap miners have low debt, strong free cash flow, and they've been returning capital to shareholders through dividends and buybacks. That's different from the 1970s when many companies were overleveraged. Luna: Still, an 18 percent weekly move feels like it's pricing in a lot of good news. What if growth picks up and inflation moderates? Then gold could reverse, and miners would get hit hard. Lucas: That's the risk. If the economy surprises to the upside — say, real GDP growth accelerates above 2 percent and core CPI starts to ease — then the stagflation narrative unwinds. Gold could drop, and miners would fall even more due to that same operating leverage. Luna: So it's a binary bet. You're either betting that stagflation persists, or you're betting it doesn't. Lucas: Pretty much. And right now, the market is leaning heavily into the persistence camp. But valuations matter. The GDX is trading at a price to earnings ratio of around 22, which is above its historical average of 18. So it's not cheap. Luna: That said, if gold continues to rally, those earnings estimates will go up, and the P/E could come down even if the stock price rises. It's a dynamic situation. Lucas: Yeah, and that's exactly what we're seeing in real time. The rally is being driven by multiple expansion as much as earnings upgrades. Investors are willing to pay more for each dollar of earnings because they expect those earnings to grow. Luna: Speaking of support, if you're getting value from these episodes, a couple of dollars a month genuinely helps keep the show ad-free and independent. You can find us at buy me a coffee dot com slash fexingo. Lucas: Yeah, it's a small gesture that makes a real difference for us. And we appreciate every bit of it. Luna: So, stepping back — what should a listener do with this information? Is it too late to buy gold miners after this week's surge? Lucas: That depends on your time horizon and your conviction in the stagflation thesis. If you believe we're in for a multi-year period of high inflation and low growth, then miners could still have room to run. The 1970s rally lasted years, not weeks. Luna: But if you think the market is getting ahead of itself, then chasing this move could be dangerous. The GDX is already up more than 30 percent year-to-date. Lucas: Right. And one thing to watch is insider selling. When executives start unloading shares after a big rally, that's often a warning sign. We haven't seen a wave of insider sales yet, but it's something to monitor. Luna: Also, keep an eye on the JOLTS data. Job openings rose to 7.6 million in April, up from 6.9 million. If the labor market stays tight, that could keep wage pressures high and inflation sticky. Lucas: Exactly. And the Federal Reserve is watching that data closely. If the economy shows signs of overheating despite slow growth, they may have to tighten further, which would be a headwind for gold. Luna: So the gold miners rally is a bet on stagflation, but it's not a sure thing. The data over the next few months will be crucial. Lucas: That's the takeaway. We'll be following it closely. For now, the market is speaking loudly — whether it's right remains to be seen.