Latest / Inflation and Your Money with Fexingo: Protecting Purchasing Power and Beating Inflation / How Inflation Is Quietly Eating Your Gold Miners Profits
Transcript
- Lucas: So gold is having a moment. The metal is up almost six percent in the last five days, and the miners are up even more—the GDX ETF, which tracks the big gold miners, is up over twelve percent. That's a huge move. Luna: Yeah, that's a striking gap. The miners are up double the metal. Is that just the leverage of operating leverage, or is something else going on? Lucas: Right, you'd think that with gold up that much, miners would be printing money. And they are—to a point. But the thing is, their costs are rising faster than the gold price in many cases. The market's pricing in a lot of that future profit, but the underlying economics are getting squeezed. Luna: How so? I mean, gold is gold. You dig it out of the ground and sell it. What's eating into the profit? Lucas: It's the inputs. Mining is energy-intensive, it's labor-intensive, and it's capital-intensive. Energy prices have been volatile, labor costs are up because it's a tight job market, and then there's the big one—replacing the ore you're mining out. Every ounce you pull out of the ground is an ounce you have to find again, and finding it is getting more expensive. Luna: So it's not just the cost of mining today, it's the cost of mining tomorrow. That's a longer-term pressure. Lucas: Exactly. And the industry tracks this with something called all-in sustaining costs, or AISC. That's the total cost per ounce, including exploration, sustaining capital, and even things like closure costs. When gold goes up, those costs don't stay flat. They drift up with inflation too. Luna: And I'm guessing that drift is part of why the gold rally doesn't always translate into windfall profits for shareholders. Lucas: Right. In a perfect world, gold goes up ten percent and your costs stay flat, so your margin expands. But in reality, your costs are going up too—maybe not as fast, but they're going up. And if you're an investor, you have to ask: is the market already pricing in that margin expansion? Because after a twelve percent move in a week, it might be. Luna: So what's the actual number? Like, what are the average all-in sustaining costs right now? Do we have a sense? Lucas: It varies a lot by company, but the industry average has been creeping up. I've seen estimates around fourteen hundred to fifteen hundred dollars an ounce, depending on the region. And with gold at forty-six seventy-three, that's still a decent margin. But the trend is what matters. If costs keep climbing at five or six percent a year, that margin shrinks even if gold holds steady. Luna: So the gold price is up, but the cost of getting it out of the ground is up too. It's like getting a raise but your rent goes up the same week. Lucas: That's exactly the analogy. And it's not just the operational costs. There's also the capital expenditure to develop new mines, which has ballooned. Permitting, construction, equipment—all of that is more expensive in an inflationary environment. So the long-term supply picture is actually constrained, which could support gold prices. But it also means the miners have to spend a lot of that cash flow just to maintain their production. Luna: And if they're not generating free cash flow after that, then the dividend story and the buyback story kind of fall apart. Lucas: Yes. And that's the tension. The market right now is paying up for gold miners like there's a lot of free cash flow coming. But if the cost inflation keeps eating into that, the actual earnings might disappoint. It's a classic case of expectations running ahead of fundamentals. Luna: So for someone listening who's thinking, 'I want to protect my purchasing power from inflation, maybe I should buy a gold miner ETF'—what should they be watching? Lucas: First, watch the all-in sustaining costs for the specific companies in that ETF. Second, watch what they're doing with their capital—are they reinvesting in growth, or are they returning cash to shareholders? And third, watch the gold price, obviously, but also the dollar and real interest rates. If real rates stay low, gold has tailwinds. But if rates start to rise, gold can stall, and miners can drop even more than the metal. Luna: And real rates—we've seen the ten-year breakeven inflation rate tick up to two point three four percent. That's a sign the market is pricing in more inflation, which could support gold. But if the Fed hikes rates to fight that, then real rates could jump and hurt gold. Lucas: Right. And that's why the miners are a leveraged bet on inflation. They're more volatile than gold itself. Which is great when things go your way, like this week, but it cuts both ways. Luna: So the takeaway isn't 'avoid gold miners,' it's 'understand the costs before you buy the rally.' Lucas: Exactly. And that's the kind of thinking that we try to encourage on this show—looking past the headline number to the underlying economics. And you know, that's something we take seriously here. We keep the show ad-free so we can keep having these honest conversations, and that's only possible because of listener support. Luna: Yeah, if you've gotten something out of these episodes, a couple of dollars a month genuinely makes a difference. You can do that at buy me a coffee dot com slash fexingo. Lucas: And it helps us keep the lights on and the research budget alive. But back to the miners—another thing to watch is the difference between the gold price and the gold miners' actual earnings. Sometimes the market gets ahead of itself. You saw that with the GDX up twelve percent in a week. That's a big move, and it's worth asking whether the earnings will catch up. Luna: And if they don't, you could see a pullback. So maybe the smarter play is to look at the miners' costs before chasing the rally. Lucas: Right. And there's also the question of whether the gold price itself is sustainable. The breakeven at two point three four is up, but it's not screaming. The CPI came in at three thirty-two point eight, up slightly from the month before. So inflation is still there, but it's not accelerating. That's a mixed picture for gold. Luna: So it's not a clear-cut 'buy gold miners' signal. It's more nuanced. Lucas: It always is. And that's the point. Protecting your purchasing power isn't about picking the hottest sector of the week. It's about understanding what you own and what the real drivers are. For gold miners, the drivers are the gold price, the costs, and the capital allocation decisions of management. Luna: And if you're going to buy a miner, you might want to check their reserve replacement. If they're not finding new ounces, they're literally digging themselves into a hole. Lucas: Exactly. That's the long-term sustainability metric. A miner that replaces its reserves is investing in its future. One that doesn't is more like a melting ice cube. And in an inflationary environment, the cost of that reserve replacement only goes up. Luna: So for the investor who wants to protect purchasing power, maybe the better play is to look at the miners with the lowest costs and the best reserve replacement, rather than just the ones that move the most on gold up days. Lucas: That's the disciplined approach. And it can be rewarding, because those are the companies that can grow their dividends over time, which is a real inflation hedge. But it requires doing homework, not just buying the ETF with the biggest gain. Luna: And that homework—looking at the AISC, the reserve replacement, the balance sheet—that's the kind of thing that can make a difference over the long run. Lucas: Absolutely. So this week's gold rally is a good reminder that markets can get ahead of themselves. The miners are up big, but the costs are rising, and the earnings may not match the enthusiasm. Keeping your head and looking at the fundamentals is always a good strategy, especially when inflation is in the headlines. Luna: And that's a wrap for today. Thanks for listening, and we'll catch you next time.