Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / Why Gold Is Surging Despite Cooling Inflation
Transcript
- Lucas: So gold hit $4,548 an ounce on Friday — that's a fresh record, and it's up more than 2 percent just this week alone. The GDX, which tracks gold miners, jumped over 5 percent in five days. Luna: That's a huge move for miners. And it's happening while core inflation is actually cooling — the Fed's preferred gauge, core PCE, came in at 3.3 percent in April, right where the market expected. Lucas: Exactly. So the textbook story says gold thrives when inflation is hot. But here we are with inflation edging down — core CPI slipped to around 3.1 percent year-over-year — and gold is making new highs. That tells me the market is pricing in something beyond just consumer prices. Luna: What's the 'something'? Geopolitical risk? The Iran conflict has been running for months now, and we just saw a headline that the average household is paying $450 more in energy costs because of the war. Lucas: That's part of it. But the bigger driver, I think, is that gold has become a hedge against fiscal instability — not just short-term inflation. Central banks around the world have been buying gold at a pace we haven't seen since the 1960s. The People's Bank of China, the Reserve Bank of India, even central banks in Eastern Europe — they're all diversifying away from dollar-denominated reserves. Luna: So you're saying gold's rally is less about CPI and more about a loss of faith in fiat currencies generally? That's a much bigger story. Lucas: I think that's exactly right. And it's not just central banks. Retail investors are piling into ETFs like GLD. The SPDR Gold Trust, which is the biggest gold ETF, has seen steady inflows this quarter. People are looking at the Iran situation, at the fiscal deficit — which is still running north of $1 trillion — and they're saying, 'I want something that isn't a government promise.' Luna: But is there a risk that this is getting crowded? I mean, gold miners are up 5 percent in a week. That feels like momentum chasing. Lucas: It could be. And you have to remember that gold doesn't pay a dividend, it doesn't have earnings. It's purely a store of value. So when you buy at $4,548, you're betting that someone else will pay more later. That's the definition of a speculative position. Luna: But central banks aren't speculating — they're buying for strategic reasons. That creates a floor, doesn't it? Lucas: It does. And that's the argument for why gold might stay elevated even if inflation continues to cool. Central bank buying is relatively price-inelastic. They're not trying to time the market; they're trying to reduce exposure to dollar assets. Last year, central banks bought over 1,000 tonnes of gold. That's a structural demand shift. Luna: So if central banks keep buying, and geopolitical tensions stay high, gold could have legs. But what about the opportunity cost? Real yields are still positive — the ten-year Treasury is around 3.6 percent after inflation. That's a decent alternative. Lucas: Right, and that's the bear case. If the Fed eventually cuts rates — which the market is still pricing in for later this year or early next — then bonds become less attractive, and gold's opportunity cost drops. But if rates stay higher for longer, gold has to compete with yield. So far, it's been winning that competition. Luna: And that's partly because the market doesn't fully believe the Fed. Even though core PCE is cooling, the Fed's own rhetoric has been hawkish. Kashkari said this week that the inflation fight takes priority, and Goolsbee pointed out that energy inflation is more persistent than expected. Lucas: Yeah, Goolsbee specifically said 'energy inflation has been more persistent than expected.' And that's important because energy feeds into everything — transportation, manufacturing, even food production. So headline CPI might not drop as fast as core suggests. Luna: So gold is basically pricing in a scenario where inflation stays sticky, geopolitical risk lingers, and central banks keep diversifying. That's a pretty potent cocktail. Lucas: It is. And look, if walking through the economy with us has made something click, a couple of dollars a month is genuinely what keeps these shows going. You can find us at buy me a coffee dot com slash fexingo. Luna: Yeah, it's a small thing that makes a real difference — keeps us ad-free and independent. So if you've gotten something out of the episodes, we'd appreciate it. Lucas: Alright, back to gold. One thing I want to watch is the GDX to gold ratio. Gold miners have been outperforming the metal itself — up 5 percent this week versus gold's 2 percent. That can be a sign that the market is pricing in higher gold prices ahead, because miners' profits are leveraged to the gold price. Luna: So if you think gold goes higher, miners are the leveraged play. But if gold stalls, miners get hit harder. It's a double-edged sword. Lucas: Exactly. And that's why I'm more cautious on the miners here. The rally has been fast. But the underlying thesis for gold — central bank buying, fiscal uncertainty, geopolitical risk — that's still intact. Luna: So for someone listening who wants to hedge, what's the better vehicle? Physical gold, GLD, or miners? Lucas: For a long-term hedge, physical gold or a low-cost ETF like GLD is probably cleaner. Miners are more of a tactical trade. You have to be right on both the gold price and the company's operational efficiency. With physical gold or GLD, you're just betting on the metal. Luna: And given the run-up, are you advising any action? Or just awareness? Lucas: I'm not giving advice — we're just economists talking. But I'd say awareness: understand that gold is sending a signal about trust in the system. That signal might be right, or it might be overblown. But ignoring it is a risk in itself. Luna: So the takeaway: gold's rally isn't just about inflation anymore. It's about a broader reassessment of risk. And that's a conversation worth having. Lucas: Exactly. And it's one we'll keep tracking as the data comes in. Thanks for listening.