Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / Why Gold Is Quietly Outperforming Tech Stocks
Transcript
- Lucas: Let's talk about gold. I know, it sounds like a conversation from 2023, but gold is quietly having a moment in the middle of 2026 — and it's doing something that should make anyone watching macro sit up. Luna: I've noticed that too. The S&P is flirting with 7,500, the NASDAQ is above 26,000, and yet gold is up about 15 percent year-to-date. That's not nothing. Lucas: Right. And the traditional narrative is that gold should struggle when real yields are this high. The ten-year Treasury yield is at 4.53 percent this week. The five-year is at 4.26. Real yields — after adjusting for breakeven inflation around 2.25 percent — are still north of 2 percent. That's a level that historically crushed gold. Luna: So why isn't it getting crushed? What changed? Lucas: Well, the short answer is that the old correlation broke around 2022. Central banks are buying gold at a pace we haven't seen since the end of Bretton Woods. The World Gold Council estimates that central banks added over 1,000 tonnes in each of the last three years. That's structural demand that didn't exist in the 2010s. Luna: And it's not just China and Russia, right? We've seen purchases from Poland, India, Turkey. It's broad-based. Lucas: Exactly. The de-dollarization thesis is real at the margin. But there's another factor that's more immediate for your average investor: the sticky inflation narrative. Core PCE is still hovering around 2.7 percent, not the 2 percent the Fed was hoping for. Markets are starting to price in that we might not get back to 2 percent without a recession — and gold thrives in that uncertainty. Luna: So it's a hedge against a failed soft landing. Lucas: That's one way to frame it. Look at what happened in the first half of this year. The NASDAQ gained about 9 percent. Gold gained about 15. That's a massive relative outperformance. And it's not because gold miners are suddenly more profitable — it's because the opportunity cost of holding gold, given the yield you can get on cash, is being outweighed by fear of fiscal dominance. Luna: Fiscal dominance — meaning that government debt levels are so high that the Fed can't raise rates enough to truly tame inflation without breaking something. Lucas: Exactly. And that's exactly the kind of environment where gold becomes an insurance policy. The Fed is stuck at 3.63 percent on the effective federal funds rate. They've been on hold since last September. The ten-year is actually above the fed funds rate — that's an uninverted yield curve, which historically has preceded recessions. So the bond market is already signaling that something's off. Luna: And yet gold is rallying into that. It's almost like the market is saying: 'I trust the Fed less than I trust a rock.' Lucas: That's a little harsh, but not entirely wrong. Let me give you another data point: job openings ticked up slightly in May to 7.6 million, but the unemployment rate is at 4.2 percent and labor force participation dropped to levels we haven't seen outside of COVID. That's a weird combination — not enough workers, but also not enough people looking for work. It muddles the inflation picture. Luna: So gold is catching a bid from both sides — central bank demand and inflation hedging. But is there a risk that if the Fed actually cuts rates, gold could sell off on a risk-on rotation? Lucas: It could happen, but I think the more likely scenario is that rate cuts come because the economy is weakening, not because inflation is licked. In that case, gold tends to do well. Remember 2007-2008? Gold initially dipped during the financial crisis, then absolutely ripped when QE started. And that was with much lower central bank demand. Luna: So you're saying the bar for gold to rally in a rate-cutting cycle is actually lower this time because of the structural buyers. Lucas: Precisely. And I think there's one more factor that doesn't get enough attention: the retail investor. We're seeing a lot of inflows into gold ETFs this year, which had been out of favor for a long time. People remember what happened in 2020 and 2021 when stimulus checks went into everything from crypto to GameStop, but now they're looking for something that feels safer while still offering upside. Luna: It's a barbell strategy — tech on one side, gold on the other. Lucas: Exactly. And the tech side is getting expensive. The S&P 500's price to earnings ratio is above 22. The NASDAQ is even pricier. Gold doesn't have an earnings multiple. It's a store of value. In a world where the dollar is weakening against a basket of currencies — the DXY is down about 4 percent year-to-date — gold becomes the alternative. Luna: So what's the one number you're watching that would make you change your mind on gold? Lucas: I'd watch the ten-year breakeven. It's stuck at 2.25 percent. If that starts moving decisively below 2 percent — meaning the market believes inflation is truly vanquished — gold could lose its bid. But if it holds above 2.3, I think gold has room to run. And I'd also watch real yields: if the ten-year real yield falls below 2 percent, that's a massive tailwind for gold. Luna: That's a good framework. And of course, if central banks suddenly stop buying, that would also change the story. Lucas: Right. But that seems unlikely in the current geopolitical environment. Look at the headlines — Europe rebalancing trade with China, French politics, Lagarde hinting at an early ECB exit. The world is not becoming more stable. And gold thrives in instability. Luna: We should note that this isn't investment advice — we're just talking macro. Lucas: Absolutely. We're not saying buy gold tomorrow. We're saying understand why it's moving. And if you want to dig deeper, the World Gold Council's quarterly reports are surprisingly readable. Luna: For those of you who find value in walking through the economy with us — we do these daily, and we deliberately keep them ad-free. If that matters to you, supporting the show at buy me a coffee dot com slash fexingo helps us keep it that way. Lucas: Yeah, it's a small thing, but it lets us focus on the data without any noise. And we appreciate anyone who chips in. Luna: Alright, back to gold. One thing I want to circle back to — you mentioned the dollar weakening. Is that a sustainable trend or just a 2026 phenomenon? Lucas: That's the million-dollar question. The dollar's strength in 2022 and 2023 was driven by the Fed hiking faster than anyone else. Now that the ECB and other central banks are either holding or cutting more slowly, the interest rate differential is narrowing. If the Fed eventually cuts while other central banks stay tight, the dollar could weaken further. That's bullish for gold. Luna: And for commodities in general, probably. Lucas: Right. But that's a topic for another episode. The takeaway today is simple: gold is telling you something about the macro environment that equity indices aren't. Don't ignore it. Luna: Agreed. And as always, we'll keep watching the data.