Latest / Inflation and Your Money with Fexingo: Protecting Purchasing Power and Beating Inflation / Why Gold Is Falling Despite Sticky Inflation
Transcript
- Lucas: Gold is supposed to be the ultimate inflation hedge, right? You buy it when prices rise, and it protects your purchasing power. Well, here we are in June 2026, inflation is still sticking above the Fed's comfort zone — CPI just hit 334.0 in May, up from 332.41 — and gold has fallen to a six-month low. It dropped 5.4 percent in the last five days alone. Luna: That is a head-scratcher. The classic narrative is that gold thrives on inflation fear. So why is it getting crushed? Lucas: The short answer is that gold doesn't actually compete with inflation directly. It competes with real interest rates — that's the nominal yield minus inflation. And right now, real rates are climbing. The ten-year Treasury yield is around 4.3 percent, and with breakeven inflation at 2.34 percent, the real yield is almost 2 percent. Luna: So when bonds actually pay you a decent return after inflation, gold loses its appeal. Because gold doesn't pay interest — it just sits there. Lucas: Exactly. And the Fed has kept the interest on reserve balances at 3.65 percent, which is flat. The effective fed funds rate is 3.63 percent. So the opportunity cost of holding gold is real. You could be earning nearly four percent in a money market fund, or two percent real in Treasuries, instead of watching gold slide. Luna: But inflation is still running hot. Core CPI came in at 336.1. Doesn't that eventually force the Fed's hand to cut rates, which would be good for gold? Lucas: That's the hope, but it's not happening yet. The market is pricing in a rate cut maybe in the fall, but the data hasn't given the Fed cover. The jobs report was hot, consumer spending is resilient. So the 'higher for longer' narrative is winning. And gold hates that. Luna: Plus the dollar has been strong. Gold is priced in dollars, so when the dollar rallies, gold typically falls. Lucas: Right. The dollar index is up about 4 percent this year. That's a headwind. But I think the bigger story is the structural shift in how investors are thinking about hedges. For years, gold was the default 'fear trade.' Now, with real yields positive, the fear trade is actually short-duration bonds or cash. Luna: And yet the S&P 500 is down 1.2 percent in the last five days. The NASDAQ is off 1.5 percent. So it's not like stocks are ripping. Money is rotating out of gold, but where is it going? Lucas: Some into bonds, some into cash. The Russell 2000 is actually up 1.4 percent over the same period — small caps are benefiting from a domestic focus and less exposure to the strong dollar. But gold miners are getting hammered. GDX, the gold miners ETF, dropped 4.6 percent in five days. That tells you the pain is broad. Luna: So for the average listener who owns a gold ETF like GLD — down 5.4 percent — what do you do? Hold, sell, or buy more? Lucas: I'd say don't panic. Gold is volatile. But understand what it's doing in your portfolio. If you bought it purely as an inflation hedge, you might be disappointed in the short term. But over a full cycle, gold does tend to catch up. The issue is timing — nobody knows when the Fed will pivot. Luna: And if you're buying it for portfolio insurance, there are cheaper ways to get that now. Like put options on the S&P 500 or long-duration Treasuries. Lucas: Exactly. The old playbook — 'buy gold when inflation rises' — needs an asterisk. It works when real rates are falling. When they're rising, gold tends to lag. And I'd argue that's the regime we're in right now. Luna: Let's zoom out. Over the past 20 years, gold has averaged about 8 percent annual returns. That's decent. But since 2020, it's been more of a yo-yo. Do you see a catalyst that could turn it around? Lucas: A recession would do it. If the economy slows enough that the Fed cuts aggressively, real rates drop, and gold rallies. Or a geopolitical shock. But those are hard to predict. Central bank buying has been a tailwind — especially from China and India — but even that seems to be slowing. Luna: Speaking of central banks, the Fed's balance sheet runoff is still ongoing. That's soaking up liquidity, which tends to be negative for gold. Lucas: Good point. Quantitative tightening reduces the money supply, and gold has historically been a liquidity-sensitive asset. Less liquidity, less demand for speculative assets. And gold is speculative in the sense that its value depends on what someone else will pay for it. Luna: So if gold is falling because real rates are rising and the dollar is strong, what does that tell us about inflation expectations? Is the market saying inflation is transitory after all? Lucas: No, I don't think so. The ten-year breakeven is 2.34 percent, which is actually up from 2.33 last week. So inflation expectations are stable, not collapsing. The market isn't saying inflation is going away. It's saying that holding a non-yielding asset in a high-yield environment isn't appealing right now. Luna: Interesting. So the paradox is that gold is falling not because inflation fears are fading, but because the opportunity cost is too high. Lucas: Exactly. And that's a theme we'll keep coming back to. In this environment, cash actually has a yield, and that changes everything. Luna: Before we pivot, can I bring up something? This kind of analysis is why I love doing this show. And I know our listeners are sharp — they're asking these same questions. If you find these conversations useful, and you want to keep them ad-free and independent, there's a simple way to support us. Lucas: Yeah, it genuinely makes a difference. A couple of dollars a month — whatever feels right — helps us cover research costs and keeps the podcast sustainable. If you've gotten something out of our episodes, you can go to buy me a coffee dot com slash fexingo. Luna: And it's not about big pledges. Just knowing that listeners appreciate what we do and want to see it continue is powerful. Lucas: Alright — back to the gold puzzle. Let's talk about silver. It fell even harder — down 6.4 percent in the last five days. Silver is more volatile than gold because it has both monetary and industrial demand. And right now, industrial demand is softening. Luna: The PMI data has been weak in manufacturing. So silver gets hit from both sides — a strong dollar and weaker industrial activity. Lucas: Right. And the gold-silver ratio has widened, which historically can signal a bottom in silver. But we're not there yet. Luna: So for someone who wants to allocate to precious metals now, would you recommend waiting for a clearer signal? Or dollar-cost averaging? Lucas: I think dollar-cost averaging makes sense if you have a long time horizon. Trying to catch a falling knife is risky. But if real rates start to peak, that's your cue. Watch the two-year Treasury yield — that's the most sensitive to Fed expectations. If it drops below 3.5 percent, that could be a turning point. Luna: And what about gold mining stocks? They're down more than bullion — GDX fell 4.6 percent. Sometimes that's a leading indicator. Lucas: It can be. Mining stocks are leveraged to the gold price because their costs are relatively fixed. So if gold falls 5 percent, earnings can drop 15 percent. But they also rally harder when gold turns. For aggressive investors, they offer a higher beta play. But in this environment, I'd be cautious. Luna: So the big picture: gold is telling us that the market believes the Fed will keep rates higher for longer, and that real returns on cash and bonds are attractive enough to pull money away from hard assets. That's a pretty sobering message for anyone hoping for a quick pivot. Lucas: It is. But it's also an opportunity to reassess what 'hedge' really means. If you own gold, ask yourself: am I hedging against inflation, or against a collapse in financial assets? Because those two scenarios have very different implications for gold. Right now, we're in a regime where the economy is okay, inflation is sticky, and real rates are positive. Gold doesn't shine in that environment. Luna: And for our listeners who are building portfolios, maybe the lesson is diversification across different types of hedges — not just gold. Lucas: Exactly. TIPS, commodities, real estate, even a small allocation to cash. The goal is to have something that works in each regime. Gold will have its day again. But today is not that day.