Latest / The Commodities Economy with Fexingo: Oil, Gold, Wheat, and Raw Material Markets / Why a Cooling CPI Is Not Cooling Gold
Transcript
- Lucas: So gold is sitting at forty-four fifty an ounce, up almost five percent this week, and that's the story that's got everyone's attention. But here's what's weird — the CPI just printed lower, core inflation is basically flat, and the ten-year breakeven is actually down. By every textbook measure, gold should be taking a breather, not running to a record. Luna: Yeah, that's the part that doesn't add up. If inflation is cooling, why is the inflation hedge on fire? Lucas: Right, and that's the question I want to dig into today. Because the old story — gold as an inflation hedge — that's clearly not what's driving this. Look, the CPI fell from three thirty-three point nine eight to three thirty-two point six in June. Core PCE is basically flat. And yet gold is up nearly five percent in a week. So either the market doesn't trust those numbers, or something else is going on. Luna: What's the something else? Central banks? Lucas: Central banks are part of it, but I think the bigger shift is that gold is trading less like an inflation hedge and more like a dollar hedge. And when you look at the past few years, that's the real story. Since 2022, central banks have been buying gold at a pace we haven't seen since the seventies. And it's not just the usual suspects like Russia or China — it's central banks in the Middle East, in Asia, even in some Eastern European countries. Luna: So they're diversifying away from the dollar. But why now? Is it about sanctions or something bigger? Lucas: Exactly. The freezing of Russian central bank assets in twenty twenty-two was a wake-up call. If your reserves are in dollars or euros, they can be frozen overnight. Gold is a bearer asset — you can hold it, you can move it, it's outside the system. So central banks are buying it not as a bet on inflation, but as insurance against geopolitical risk. Luna: And that's why the Iran headlines matter. The Strait of Hormuz is back in the news, oil's up ten percent this week, and gold is reacting to that same fear. Lucas: Precisely. Look at the numbers — Brent is up ten point six percent in five days, and gold is up four point eight. They're both moving on the same geopolitical stress. And that's not an inflation trade, that's a fear trade. Gold is becoming the go-to asset when people worry about the rules of the game changing. Luna: So if it's fear, not inflation, what does that mean for the Fed? Are they looking at this and thinking, okay, inflation's cooling, we can ease — but gold's screaming something else? Lucas: That's the tension. The Fed's preferred gauge, the PCE, is down. Core PCE is actually up a hair — one thirty point three versus one thirty point zero nine — but it's negligible. So on the data, they have room to cut. But if gold is rallying because of dollar concerns, then cutting rates might actually accelerate that move. You'd be adding more liquidity into a system that's already questioning the dollar's long-term value. Luna: So you're saying gold is pricing in a potential policy mistake. Either the Fed cuts too soon and inflation comes back, or they don't cut and something breaks. Lucas: Exactly. And that's why I think gold is more interesting right now than oil. Oil is rallying on a supply shock — the Iran headlines, the Strait of Hormuz. But that's a tactical move. Gold is rallying on a structural shift in how the world thinks about reserves. That's a much bigger deal. Luna: Now let's talk about copper, because it's the weird one this week. It's down about one percent while everything else is up. What's that telling us? Lucas: Copper is the barometer for the real economy. And when you see oil and gold up but copper down, that's a signal that the geopolitical fear is not translating into actual demand. Oil is about supply. Gold is about fear. Copper is about factories, construction, electric vehicles. And right now, the global economy is cooling. So copper is saying, hey, the real economy isn't strong enough to justify higher prices. Luna: So we've got a divergence: oil and gold are up on fear, copper is down on reality. And that's the kind of divergence that can't last forever. Lucas: Right. Eventually, either the fear fades and oil and gold come back down, or the reality worsens and copper follows. But right now, the market is paying you to be worried about the geopolitical stuff, not the economic stuff. Luna: So if you're an investor, what do you do with gold at forty-four fifty? Is it too late, or is this just the beginning? Lucas: I think the key is to not think of gold as a trade. It's not a momentum stock. If you believe the dollar's role is being questioned over the next five to ten years, then gold at forty-four fifty might be cheap. If you think it's just a fear spike, then it's probably overbought. The interesting thing is that central banks are still buying. And they're not buying for the short term. Luna: That central bank buying — do we have numbers on that? I know it's been heavy, but how heavy? Lucas: Estimates for this year suggest central banks are on pace to buy over a thousand tonnes again. That's the third year in a row. For context, before twenty twenty-two, the average was around four hundred tonnes a year. So we've more than doubled that pace, and it's still accelerating. That's not a cyclical trend; that's a structural shift. Luna: And that's why you don't see gold crashing when the CPI comes in cool. Because the buyers aren't looking at the CPI. Lucas: Exactly. And this is something we should talk about more — the fact that the tools we use to analyze gold, like real interest rates or the dollar index, they're becoming less relevant. The gold market is being driven by a different set of buyers with a different set of priorities. Luna: Makes you wonder if the old models are broken. I mean, we've been saying for years that gold and real rates have an inverse relationship, and that's just not holding up. Lucas: Right, and that's what makes this episode so interesting. We're in a regime where the old rules don't apply. And if you're relying on those old rules to make decisions, you're going to get caught flat-footed. Luna: So where does that leave the everyday investor? I mean, we're not central banks. We're not buying a thousand tonnes. Lucas: I think the lesson is to be humble about what you don't know. Gold is telling you something, but it's not telling you what you think it's telling you. It's not about inflation, it's about trust. And trust is hard to quantify. Luna: You know, this kind of conversation is exactly why we keep this podcast ad-free. We're not trying to sell you anything or push a narrative. We just want to help you understand what's happening in the markets, even when it's confusing. Lucas: Yeah, and if you find this kind of analysis useful, you can support us at buy me a coffee dot com slash fexingo. It's a small way to keep us going, and it means we can keep having these conversations without any commercial pressure. Luna: And we really appreciate it. Now, back to gold — Lucas, you mentioned that the dollar index is becoming less relevant. Can you unpack that a bit more? Lucas: Sure. The traditional view is that when the dollar weakens, gold rises, because gold is priced in dollars. But we're seeing gold rise even when the dollar is relatively stable. That suggests the move is not about the dollar's value against other currencies, but about the dollar's value as a reserve asset. Central banks are diversifying regardless of the dollar's short-term direction. Luna: So it's a longer-term de-dollarization story. And that's what makes this rally different from the ones we saw in the past. Lucas: Exactly. And that's also why silver is up six percent this week, even though it's not a central bank asset. Silver tends to follow gold, but with more volatility. The point is, when gold moves on fear, silver moves even harder. Luna: And what about oil? We talked about it being up ten percent on the Hormuz news. But what happens if the situation de-escalates? Does that all come back down? Lucas: Probably. The risk premium in oil is probably ten to fifteen dollars right now. If the strait stays open and the tensions ease, that premium comes out quickly. But here's the thing — the geopolitical situation is not the only driver. We have OPEC Plus increasing output, but they're also managing the market. So oil is a much more complicated trade. Luna: So to sum up: gold is a structural story, oil is a tactical story, and copper is a reality check. And the reality is that the global economy is cooling, but the geopolitical temperature is rising. Lucas: That's a great way to put it. And I think that's the takeaway for today: don't just look at why an asset is moving, look at who's buying and why. And right now, the buyers in gold are not your typical inflation hedgers. They're central banks and sovereign wealth funds making a long-term bet on a changing world order. Luna: And that's a bet we should all be paying attention to.