Latest / Inflation and Your Money with Fexingo: Protecting Purchasing Power and Beating Inflation / How Inflation Is Quietly Eating Your Gold Investment Gains - Episode 106
Transcript
- Lucas: Gold is supposed to be the ultimate inflation hedge. The thing you buy when you're worried about the dollar losing value. And yet, over the past month, gold has dropped about eight percent. Luna: Eight percent? Meanwhile the Consumer Price Index is still climbing. Core CPI just hit three hundred thirty-six point one in May, up from three hundred thirty-five point four two. Lucas: Exactly. So on the surface, that's a paradox. Inflation is running hot, gold is supposed to protect you, and instead it's falling. But if you look a little deeper, there's actually a pretty clear explanation. Luna: I think a lot of listeners have gold in their portfolios for exactly that reason — insurance against inflation. So this is a real concern. Lucas: If today's conversation helps you think about your portfolio a little differently, that's exactly why we do this. And just a quick note — the reason we can keep these shows ad-free is listener support. If you find value here, you can help at buy me a coffee dot com slash fexingo. Really appreciate it. Luna: Absolutely. It keeps us independent. So, Lucas, walk us through the mechanics. Why is gold down when inflation is still above the Fed's target? Lucas: The biggest factor is real interest rates. Gold has a strong inverse relationship with real yields. When real rates go up, gold tends to fall. And right now, the ten-year breakeven inflation rate — that's the market's expectation for average inflation over the next decade — has actually dipped a bit to two point two three percent. That's down from two point two five percent just a couple days ago. Luna: So the market is pricing in slightly lower inflation expectations, even though CPI is still elevated? Lucas: Right. And combined with the Fed funds rate holding at three point six three percent, real rates — nominal rates minus expected inflation — have become more positive. That makes holding a non-yielding asset like gold less attractive compared to, say, a short-term Treasury that's paying you something. Luna: So gold's opportunity cost has gone up. That makes sense. Lucas: Exactly. And it's not just about rates. The dollar has been relatively strong. A strong dollar is generally headwind for gold, because gold is priced in dollars. When the dollar strengthens, it takes fewer dollars to buy the same ounce of gold. Luna: So the same amount of gold is worth less in dollar terms. That's a double hit for U.S.-based gold investors. Lucas: Yes. And then there's the gold mining stocks, which have gotten hit even harder. The GDX ETF, which tracks gold miners, is down about three point seven percent over the past five days. It's trading around seventy-five dollars and change. Miners tend to be more volatile than the metal itself because they have operating leverage — if the gold price drops, their profits can fall disproportionately. Luna: So someone who bought a gold miner ETF thinking they were getting inflation protection is actually getting more pain than someone who bought physical gold or GLD. Lucas: Right. GLD, the big gold ETF, is down about one point three percent over the past five days. Still negative, but less severe. And physical gold futures are down about eight tenths of a percent over the same period. Luna: So what's the takeaway for someone who's holding gold as an inflation hedge? Is it still working? Lucas: Over the long term, gold has roughly kept pace with inflation. But in the short to medium term, it can diverge significantly. The past month is a good example. If you bought gold in early June, you've lost purchasing power in real terms — your gold is worth less, and prices are still rising. Luna: So it's not the automatic hedge that people think it is. Timing matters. Lucas: Absolutely. And there's another factor at play here: central bank behavior. Some central banks have been selling gold recently, or at least slowing their purchases. That adds to the supply overhang. Luna: Which is interesting because after Russia invaded Ukraine, a lot of central banks — especially in emerging markets — were piling into gold as a way to diversify away from dollars. Lucas: Right, that was a big theme in 2022 and 2023. But that trend may be cooling. And when the biggest buyers step back, prices can soften. Luna: So for our listeners, what's a better inflation hedge right now? I mean, TIPS? I-bonds? Commodities? Lucas: Treasury Inflation-Protected Securities, or TIPS, are directly tied to CPI. Their principal adjusts with inflation. So they're a cleaner hedge in some ways. I-bonds too, though there are purchase limits. But gold has this emotional appeal — it's tangible, it's shiny, it's been money for thousands of years. Luna: And that emotional appeal can be expensive. Lucas: It can be. Look, I'm not saying gold is worthless. It has a place in a diversified portfolio — typically five to ten percent allocation is what many advisors suggest. But it's not a one-to-one inflation hedge, especially in a rising real rate environment. Luna: So the key is to understand the mechanics: real rates, dollar strength, central bank flows. Not just buy gold and forget. Lucas: Exactly. And if you're going to own gold, consider the form. Physical gold has storage and insurance costs. Gold ETFs like GLD are easier but have expense ratios. Gold mining stocks add company-specific risk. Each has different trade-offs. Luna: And the current environment — with real rates positive and the dollar firm — favors being cautious on gold, at least in the near term. Lucas: Right. But things can change quickly. If the Fed were to cut rates aggressively, or if inflation expectations re-accelerate, gold could rally just as fast. So it's not a one-way bet. Luna: That's the part that frustrates people, I think. They want a simple yes or no on gold. Lucas: And investing is rarely that simple. But understanding the forces at work helps you make better decisions than just following a headline. Luna: Alright, so let's recap. Gold is down eight percent in the past month. The reasons: rising real rates, a strong dollar, easing central bank buying, and lower breakeven inflation expectations. None of those are permanent. Lucas: Right. And for anyone thinking about adjusting their portfolio, it's worth considering whether gold still fits their goals, or if other instruments like TIPS might be a better fit right now. Luna: Good food for thought. Thanks, Lucas. Lucas: Thanks, Luna. And thanks to everyone listening. Keep asking questions.