Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / Why Gold Is Rallying While CPI Falls
Transcript
- Lucas: So here's something that's been bugging me, and I think it probably bugs a lot of our listeners too. The June CPI numbers came out a few weeks ago—headline CPI down to 332.6, core CPI basically flat at 336.1. Inflation is clearly cooling. And yet, gold is at four thousand one hundred and fifty-two dollars an ounce. Silver just had its best week in months, up seven and a half percent in five days. Luna: Right, the classic 'inflation is falling so gold should fall' narrative just isn't playing out. What's actually driving it? Lucas: Well, the first thing I'd point to is real yields. The ten-year Treasury yield is around four point two percent, and with headline CPI running at about two point nine percent year-over-year, real yields are still positive but they've been falling from their peaks. Historically, gold tends to rally when real yields decline, because the opportunity cost of holding a non-yielding asset drops. Luna: And we saw the ten-year breakeven inflation rate tick up to two point two six percent yesterday. So even as CPI drops, the market's pricing in slightly higher inflation expectations going forward. Lucas: Exactly. That's the disconnect. CPI is backward-looking. The breakeven rate is forward-looking. And the breakeven has been creeping up since May. It was around two point one five percent back in April. Now it's two point two six. That's eleven basis points of higher expected inflation, which is meaningful for gold. Luna: So the market is basically saying, 'Yeah, inflation cooled in June, but we don't think that trend is sustainable.' Lucas: Right. And there's another factor here that's bigger than usual: central bank buying. We've seen really aggressive gold purchases from central banks in emerging markets—China, India, Turkey, Kazakhstan. They've been diversifying away from dollar reserves, especially after the sanctions on Russia. That demand is fairly price-inelastic. They're buying regardless of what CPI does. Luna: Do we have a number on how much central banks bought in the first half of this year? Lucas: The World Gold Council hasn't released Q2 totals yet, but Q1 was about two hundred and eighty-eight metric tons. That's down a bit from last year's record pace, but still well above the five-year average. And the People's Bank of China has been buying for eighteen consecutive months now. Luna: So the official sector is providing a floor under gold regardless of the inflation data. But I want to push back on something: isn't gold supposed to be an inflation hedge? If inflation's actually falling, shouldn't gold be falling too? Lucas: That's the textbook view, and it's not entirely wrong. But the relationship is more nuanced. Gold hedges against unexpected inflation, not the headline number. If inflation comes in lower than expected, gold can still rally if the market thinks the Fed will cut rates faster. And right now, with the Fed funds rate stuck at three point six three percent and inflation trending down, the market is pricing in at least two rate cuts by year-end. Luna: And lower rates weaken the dollar, which is another tailwind for gold. The dollar index has been sliding since April. Lucas: Exactly. So you've got falling real yields, rising breakeven inflation expectations, aggressive central bank buying, and a weaker dollar. That's a pretty powerful cocktail for gold. And silver tends to amplify those moves because it's both a monetary metal and an industrial metal. Silver's up over seven percent in five days—that's partly the gold rally spilling over, but also expectations of stronger industrial demand if the economy soft-lands. Luna: Let's talk about the geopolitical angle. A lot of gold's recent move—especially in the past week—coincided with the news about Kevin Warsh and the Fed signaling maybe a more cautious approach. And the tariff headlines from the Trump camp about generic drug tariffs starting in 2028. Lucas: Yeah, geopolitical uncertainty is definitely in the mix. When you have trade policy uncertainty—tariffs that could reignite inflation years down the road—it creates demand for hard assets. Gold is the ultimate 'I don't trust the system' asset. And we're in a moment where both fiscal and monetary policy are unusually uncertain. Luna: So would you say that the gold rally is more about rate-cut expectations, or more about fear of future inflation? Lucas: I'd split it roughly fifty-fifty. The immediate catalyst is the rate-cut narrative—lower real yields make gold more attractive. But the structural support is the fear that central banks have lost control of inflation, or that fiscal dominance will force them to keep printing money. The breakeven inflation rate moving up tells you that the market is not fully convinced the inflation fight is over. Luna: And that's why you see gold miners doing even better than gold itself. GDX, the gold miner ETF, is up over seven percent in five days. That's almost double the move in GLD. Lucas: That's a classic sign of a healthy rally. Miners tend to have operating leverage to the gold price—if gold goes up ten percent, their profits can go up twenty or thirty percent because their costs are relatively fixed. So when gold rallies, miners rally even more. GDX at seventy-six fifty-four is actually near its all-time high. Luna: But let's bring this back to the everyday listener. If you're not a gold bug, what does this mean for your portfolio? Or for your sense of where inflation is headed? Lucas: I think the key takeaway is that inflation is not dead. The CPI number was good news, but markets are looking ahead. If breakeven inflation keeps rising, that could eventually feed into higher mortgage rates, higher car loan rates, higher credit card rates. The Fed might have to hold rates higher for longer, which would be a headwind for stocks and a tailwind for gold. Luna: So gold is sort of the canary in the coal mine for inflation expectations? Lucas: It's one of them. The other is the breakeven itself. And the fact that both are moving up while CPI is moving down is a divergence worth watching. If that continues, it could signal that the disinflation trend is stalling. Luna: Alright, so before we wrap this thread, I want to ask: do you think gold can hold above four thousand? Or is this a speculative blow-off? Lucas: That's the four-thousand-dollar question. I think the structural drivers are real—central bank buying isn't going away, fiscal deficits aren't shrinking, and geopolitical tensions aren't easing. But the short-term momentum is extreme. Gold is up about twenty-five percent year-to-date. That's a huge move for a typically slow-moving asset. I wouldn't be surprised to see a pullback to thirty-eight hundred or so before it resumes its uptrend. Luna: So maybe not a blow-off, but due for a breather. Lucas, this has been really helpful. I think a lot of our listeners are confused by the disconnect between what they see in their grocery cart and what they see in the gold price. Lucas: And that confusion is exactly why we do this show. If walking through the economy with us has made something click—whether it's understanding breakeven rates or why central banks buy gold—we'd love it if you considered supporting the show. The thing is, a couple of dollars a month is genuinely what keeps these going. You can find us at buy me a coffee dot com slash fexingo. That's buy me a coffee dot com slash fexingo. No pressure at all, but if you've gotten value, it helps us stay ad-free. Luna: Yeah, and it really does make a difference. Even a few contributions a month cover hosting costs and research tools. So thanks to anyone who does. Lucas: Absolutely. Now, back to that gold miner rally—I want to talk about one specific stock that's been on a tear, and why its fundamentals might actually justify the move. Luna: Which one are you thinking? Lucas: Agnico Eagle Mines. It's a Canadian gold miner with operations in Canada, Finland, and Australia. They reported Q2 production last week that beat estimates, and their all-in sustaining costs actually dropped to around twelve hundred dollars per ounce. With gold at forty-one fifty, that's a margin of almost three thousand dollars per ounce. Luna: And their stock is up about thirty percent year-to-date. So the market is rewarding that margin expansion. Lucas: Exactly. And what I like about Agnico is that they've been disciplined with capital allocation—they're not chasing growth for growth's sake. They've been paying down debt and increasing dividends. So even if gold pulls back, their downside is somewhat protected by a strong balance sheet. Luna: That's a good example of how to play the gold thesis without just buying the metal itself. So for someone listening who's intrigued by gold but doesn't want to open a commodities account, a miner like Agnico might be a way in. Lucas: Exactly. But as always, do your own research. Mining stocks can be volatile—they have operational risks, geopolitical risks, and they're leveraged to the gold price. But if you believe the gold rally has legs, they're worth a look. Luna: Alright, Lucas. Good stuff. I think we've given listeners a solid framework for understanding the gold cpi disconnect. Anything else you'd add? Lucas: Just one thing: keep an eye on the Fed's language. Kevin Warsh's recent comments about the neutral rate and the timing of cuts will be parsed closely. If the Fed signals a more dovish path, gold could take another leg up. If they push back, expect a pullback. Either way, it's going to be an interesting second half of the year. Luna: Well said. Thanks for listening, everyone. We'll catch you next time.