Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / Why Gold Rallies While CPI Cools
Transcript
- Lucas: So gold is up over seven percent in the last five days, and it's sitting at around forty-three hundred dollars an ounce. Meanwhile, the latest CPI reading actually came in lower than the previous month. That's a pretty odd combination, right? Luna: Yeah, usually gold does well when inflation is hot. What's going on? Lucas: Well, the first thing to remember is gold doesn't only move on inflation. It's also a barometer for real interest rates and overall confidence in the system. And right now, you've got a few things pulling in the same direction. Luna: Like what? Lucas: Take the July jobs report. The economy actually lost twenty-three thousand jobs, which caught a lot of people off guard. That raises the odds that the Fed might start cutting rates sooner than they've been signaling. Luna: And lower rates tend to be good for gold, right? Because the opportunity cost of holding it drops. Lucas: Exactly. When yields fall, gold becomes more attractive because it doesn't pay interest. And in the last week, the ten-year Treasury yield has been drifting down. That's a classic support for gold. Luna: But then why is gold rallying if inflation is cooling? Wouldn't that be bad for gold? Lucas: That's the twist. The market isn't just looking at headline CPI. They're looking at what's called real yields, which is the nominal yield minus expected inflation. And real yields have been falling because the nominal yield is dropping faster than the breakeven inflation rate. Luna: So the market is pricing in lower growth, maybe even a recession risk, and that's actually more supportive for gold than inflation is. Lucas: Precisely. Gold is acting like a safe haven, not just an inflation hedge. And you can see that in the gold miners too. The GDX ETF is up over eighteen percent in five days. That's a massive move. Luna: Wow, that's a big jump. What's driving that? Is it just the gold price? Lucas: Partly, but miners also have operating leverage. When gold prices rise, their margins expand quickly, and the market prices that in. Plus, some of these companies have been struggling with cost inflation, so any relief in input costs helps. Luna: But let's step back. If CPI is still falling, why is gold acting like we're in a crisis? Lucas: Because the market is worried about growth. Remember, core PCE, which is the Fed's preferred gauge, actually ticked up last month. So inflation isn't uniformly cooling. And with jobs weakening, the picture is muddier than a single CPI print suggests. Luna: So it's not that gold is ignoring inflation; it's that it's pricing in a different scenario. Lucas: Right. And there's another factor: central bank demand. A lot of central banks, especially in emerging markets, have been buying gold heavily. They're diversifying away from the dollar, and that's been a steady bid under the market. Luna: Is that something we can see in the data? Lucas: We don't get real-time data, but the World Gold Council reports quarterly. And the trend has been consistent for a couple of years now. Central banks are buying gold at a pace we haven't seen in decades. Luna: So when you combine falling real yields, weak jobs data, and central bank buying, gold has a lot of tailwinds. Lucas: Exactly. The interesting part is what this means for the rest of the market. The S&P 500 is up over two percent in five days, the Nasdaq is up three. So equities are also rallying, but they're rallying on rate-cut hopes. Gold is also rallying, but for different reasons. Luna: That's a bit of a divergence. Are they both right? Lucas: They can be, for a while. But one of them might be wrong. If the Fed cuts rates because inflation is truly under control, then gold might not have as much upside. If the Fed cuts because growth is falling apart, then equities might be too optimistic. Luna: And gold is kind of the canary in the coal mine for that scenario. Lucas: I think that's a fair way to put it. Gold is often the first asset to sniff out trouble. It's not always right, but when it starts moving this fast, it's worth paying attention to. Luna: And it's not just gold itself. Silver is up almost ten percent in five days too. Lucas: Silver has a lot of industrial demand, so it moves a bit differently. But when both metals are climbing together, it reinforces that something is shifting in the macro backdrop. Luna: So, what's the takeaway for someone watching their portfolio? Lucas: I'd say don't read too much into any single asset's move. But the breadth of this rally — gold, silver, miners — suggests that a lot of investors are hedging against uncertainty. And that's a signal that the market is not as comfortable as the equity rally might suggest. Luna: That's a good point. And it also shows why you need to look beyond headline CPI to understand what's really happening. Lucas: Exactly. And that's the kind of thing we try to do here. If walking through the economy with us has made something click, there's a small thing you can do to help. A handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that's literally what funds making this many of these. Luna: It's a simple way to keep this show ad-free and independent. And it goes a long way. Lucas: Alright, back to gold. So, one thing I find interesting is that despite the strong rally, gold is still below its inflation-adjusted peak from the early 1980s. So some would argue it still has room to run. Luna: But that's a long-term view. What about the next few months? Lucas: That depends a lot on the Fed. If they cut rates and inflation stays low, gold might lose some momentum. But if the economy weakens faster, gold could keep climbing. Luna: So it's really a coin flip. Lucas: In the short term, yeah. But the underlying drivers — central bank buying, real yields, and fiscal concerns — those are still in place. So I'd expect gold to remain well-supported, even if it takes a breather. Luna: And with the jobs report last week, the market is now pricing in a higher chance of a rate cut in September. Is that a fair reading? Lucas: The futures market has moved, yes. But remember, the Fed has been pretty clear that they want to see more evidence that inflation is sustainably moving toward two percent. One weak jobs report might not be enough. Luna: So gold might be getting ahead of itself. Lucas: Possibly. But gold has a habit of moving before the data confirms it. That's what makes it such a fascinating asset to watch. Luna: Well, I'm definitely keeping an eye on it now. Thanks for breaking it down. Lucas: Always a pleasure. Until next time, keep your eyes on the real yields.