Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / Why Gold Is Outperforming Stocks in a Stagflation Era
Transcript
- Lucas: So Luna, I've been watching the tape this week, and there's one number that just keeps pulling me back. Gold, up more than seven percent in five days. That's not a normal move for a metal people call a safe haven. Luna: Seven percent in a week – that's the kind of move you expect from a meme stock, not from gold. What's driving it? Lucas: Right, and that's the puzzle. Because on the surface, you've got a stock market that's also grinding higher. The S&P 500 is up over two percent this week. But gold is moving with a force that suggests investors are hedging something. Luna: Hedging what, exactly? Because the headlines this week – that jobs report was pretty weak, right? Lost 23,000 jobs in July. Lucas: Exactly. That jobs report is the key. You've got an economy that's still creating jobs, barely, but the momentum is clearly slowing. Real GDP growth just dropped to one point five percent annualized. And yet core inflation is still running above two percent. That's the textbook definition of stagflation. Luna: So when you get that mix of slow growth and sticky inflation, historically gold has been the asset that thrives. Is that what we're seeing now? Lucas: It is, and it's worth remembering the 1970s playbook. Back then, gold went from around thirty-five dollars an ounce in 1971 to over eight hundred by 1980. The S&P 500, adjusted for inflation, basically went nowhere for a decade. Luna: That's a stark contrast. So are we in a repeat of that, or is there something different this time? Lucas: There's a key difference, and it's central banks. In the 1970s, central banks were net sellers of gold. This time, they're buyers. We've seen a decade of central banks, especially in emerging markets, diversifying away from the dollar and into gold. That structural bid is a big deal. Luna: And that's a slow-moving trend. But what about the short-term spike? Seven percent in a week – that feels like something more than just central bank accumulation. Lucas: No question. The short-term driver is real yields. When you look at the ten-year Treasury, the real yield – that's the nominal yield minus inflation expectations – has been falling. The ten-year breakeven inflation is around two point two five percent, down slightly. But nominal yields haven't risen as much, so real yields are compressed. That makes gold, which pays no yield, more attractive. Luna: So when real yields fall, gold tends to rally. And with the economy slowing, the market is pricing in less growth, which pushes real yields down. Lucas: Exactly. And you add on top of that the fear factor. The jobs report was a shock. Markets had expected positive job growth, and instead we got a loss. That kind of surprise tends to send people into safe havens. Gold is the ultimate safe haven. Luna: And it's not just gold – gold miners are up eighteen percent this week. That's a huge move. What's that telling us? Lucas: That's the leverage effect. Mining companies have high fixed costs, so when the price of gold goes up, their earnings can surge disproportionately. The GDX ETF, which tracks gold miners, is up over eighteen percent in five days. That's a signal that investors are betting on sustained high gold prices, not just a short-term blip. Luna: But isn't there a risk of a bubble? When you see moves like that in a relatively small sector, it can get frothy. Lucas: That's a fair concern. And it's why I think we need to look at the fundamentals. Gold is trading around four thousand three hundred dollars an ounce. That's a record. But if you look at the macro backdrop – slow growth, sticky inflation, geopolitical tensions – the case for gold as a hedge is still intact. Luna: And yet, the stock market is also near records. So you have both gold and stocks making new highs. That's unusual, isn't it? Lucas: It is, and it's a sign of a bifurcated market. Stocks are being driven by a handful of mega-cap tech names, while gold is being driven by macro anxiety. They're telling different stories. The Dow is above fifty-four thousand, the NASDAQ is up three percent this week, but that's not broad-based strength. It's narrow leadership. Luna: So the average investor might be sitting there thinking, 'My portfolio is up, but I feel uneasy.' And that unease is showing up in gold. Lucas: Exactly. And that's the kind of thing we like to dig into on this show. You know, if you find value in these conversations, you can support us directly. We keep the show ad-free, and listener support is what makes that possible. If you're so inclined, you can buy us a coffee at buy me a coffee dot com slash fexingo. Luna: We really appreciate that. It helps us keep doing what we do. Lucas: So back to gold. Let's talk about what this means for a typical investor. Because if you're looking at your 401k, you might not have much gold exposure. Should you? Luna: That's the practical question. Gold is often seen as a non-productive asset, but in a stagflation environment, it can be a vital diversifier. Lucas: Historically, adding a small allocation – say five to ten percent – to gold or gold miners has improved risk-adjusted returns during periods of high inflation and low growth. The key is not to overdo it. Gold doesn't pay dividends, and it can be volatile. But as a hedge, it has its place. Luna: And with the miners up so much this week, is it too late to get in? Lucas: That's the million-dollar question. Timing is everything, and chasing a move like this is risky. But if you believe the stagflationary backdrop persists, then pullbacks could be entry points. The thing to watch is whether inflation stays sticky and growth keeps slowing. If that holds, gold could have further to run. Luna: But what about the Fed? If they cut rates to combat the slowdown, that could be another tailwind for gold. Lucas: That's a great point. With a weak jobs report, the market is starting to price in rate cuts. If the Fed does cut, real yields would likely fall further, which is bullish for gold. But there's a catch – if inflation stays above target, the Fed might be hesitant to cut aggressively. That's the stagflation dilemma. Luna: So we're stuck between a rock and a hard place. And gold is the beneficiary. Lucas: Exactly. And that's why I think this gold rally is more than just a flight to safety. It's a reflection of a deeper economic reality. We're in a period where the traditional playbooks are being challenged. Growth is weak, inflation is sticky, and investors are searching for something that holds value. Luna: It's almost like the 1970s again, but with modern twists – central banks buying, and a more interconnected market. Lucas: Right. And one more modern twist: the accessibility. In the 1970s, it was hard for the average person to buy gold. Now you have ETFs like GLD, which is up over seven percent this week. Anyone with a brokerage account can get exposure in seconds. That democratization could be fueling some of the demand. Luna: So the question is, are we at the beginning of a long-term trend, or just a short-term spike? Lucas: I wish I had a crystal ball. But the fundamentals – central bank buying, real yields, economic uncertainty – suggest there's staying power. The key is to watch the data. If inflation starts to come down decisively and growth picks up, gold could lose its shine. But if we continue on this path, gold might be the best-performing asset of this decade. Luna: That's a bold statement. But it's backed by the numbers we're seeing. What do you think the biggest risk to that scenario is? Lucas: The biggest risk is a policy error. If the Fed tightens too much to fight inflation, it could tip the economy into a deeper recession. That would hurt stocks, but gold might actually benefit. Conversely, if they cut too early and inflation reaccelerates, gold would still do well. So in a way, gold is protected in both scenarios. Luna: That's interesting. So gold is almost a hedge against policy mistakes. Lucas: Exactly. And given the uncertainty around the Fed, the labor market, and global growth, it's no surprise that investors are turning to gold. The question is whether this is a rational response or just a herd mentality. But history suggests that in stagflationary periods, gold tends to outperform. Luna: So for our listeners, what's the one takeaway they should remember about gold in this environment? Lucas: The takeaway is that gold is sending a signal. It's saying that despite record stock prices, there's a deep unease about the economy. And that unease is grounded in real data – slow growth, sticky inflation, and a weakening labor market. So while you don't need to rush out and buy gold today, it's worth paying attention to what it's telling us. Luna: And if the signal continues, it might be a wise addition to a diversified portfolio. Lucas: Absolutely. But as always, do your own research and consider your own risk tolerance. We'll be watching the data closely, and we'll keep you updated on what it means for the economy and your money.