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. It's up about four percent in the last five days, and the miners are up even more than that. But I want to talk about something that doesn't get enough attention: inflation is quietly eating the profits of the very companies that mine the stuff. Luna: That seems counterintuitive. If inflation is good for gold, shouldn't it be good for gold miners too? Lucas: You'd think so, and that's exactly the trap. The metal is an inflation hedge, but the miners are businesses. And businesses have costs. Labor, energy, equipment, even the cost of borrowing. Those all go up with inflation. So while the price of gold rises, the miners' expenses rise right alongside it. Sometimes faster. Luna: So the miners are caught between two forces. The metal price goes up, but so do their input costs. Lucas: Exactly. And the key metric to watch is the margin. Last quarter, the average all-in sustaining cost for major gold miners was up in the high single digits year-over-year. Meanwhile, the CPI is running around two and a half percent. So costs are growing more than twice as fast as the general price level. Luna: That's a big gap. What's driving those cost increases specifically? Lucas: A few things. Diesel fuel for the haul trucks, which tracks oil prices. Explosives, which are energy-intensive to make. Steel for the processing plants. And then there's labor. Skilled miners are in short supply, so wages are getting bid up. In places like Australia and Canada, labor costs are up double digits over the past couple of years. Luna: So it's a classic cost-push inflation. And it's hitting the miners from every angle. Lucas: Right. And here's the thing. The market rewards gold miners when they beat earnings estimates, not when the gold price goes up. If costs are rising faster than the metal price, the earnings miss, and the stock gets punished. That's why you can see gold rally and the miners' stocks lag, or even fall. Luna: So what's happening right now? The miners are up nine percent in the last five days. Is that purely because of the gold price move? Lucas: Partly. But there's more to it. The ten-year breakeven inflation rate just ticked up to two point three percent. That's a market-based measure of expected inflation. So investors are starting to price in a bit more inflation, which is good for gold. But the miners are also benefiting from a weaker dollar and some short covering after a rough stretch. Luna: So the miners are getting a triple boost. Gold, inflation expectations, and the dollar. Lucas: Yeah. But here's the problem. The market might be getting ahead of itself. The Fed funds rate is still at three point six three percent, and the Fed hasn't signaled any cuts. If rates stay high, that's a headwind for gold, because gold doesn't pay interest. And if gold stalls, the miners' stocks have a lot further to fall, given their operating leverage. Luna: That's a good point. The miners are more volatile than the metal itself, right? Lucas: Exactly. A ten percent move in gold can easily turn into a thirty percent move in the miners, in either direction. So if you're buying gold miners as an inflation hedge, you're actually taking on a lot more risk than just owning the metal. And that's the angle we're going to drill into today. Luna: Let's do that. So what should someone who wants an inflation hedge actually do? Buy the metal, or the stocks? Lucas: It depends on what you're trying to protect. If you want to protect purchasing power against a slow, steady erosion, the metal itself is a more direct hedge. It's a store of value. The miners are a leveraged bet on the gold price, and they bring in all these other business risks. Inflation might be good for gold, but it's not necessarily good for the miners' bottom line. Luna: So the miners are more of a tactical play than a strategic one. Lucas: Yeah, and that's the key distinction. If you're a long-term investor, you might want a small allocation to gold itself, maybe five percent or less. If you're a trader who's willing to stomach the volatility, miners can offer more upside, but you have to watch the costs and the earnings quality closely. Luna: What are some of the specific cost metrics to watch? Lucas: The big one is all-in sustaining costs, or AISC, which includes everything from mining and processing to exploration and mine development. And then there's the capital expenditure for new mines, which is also going up due to inflation. If a company's AISC is rising faster than the gold price, that's a red flag. Luna: And what about the gold-silver ratio? It's been in the news lately. Lucas: The gold-silver ratio is around eighty, which is historically high. That means silver is relatively cheap compared to gold. Some investors see that as a signal to buy silver, but silver is even more volatile than gold, and it has its own industrial demand dynamics. It's not a pure inflation hedge either. Luna: So if someone wants to protect against inflation, what's the smartest move right now? Lucas: I'd say diversify. Don't put all your eggs in the gold basket. A mix of Treasury Inflation-Protected Securities, which are TIPS, maybe a small allocation to gold, and some real assets like real estate or commodities can help. And remember, the Fed is still fighting inflation, so the real yields are positive. That actually makes gold less attractive than it was a few years ago. Luna: But the breakeven inflation rate is going up. Doesn't that mean the market expects higher inflation? Lucas: It's up a couple of basis points, but it's still at two point three percent, which is below the recent peak. The market expects inflation to moderate, not surge. So the recent gold rally might be more about safe-haven demand and geopolitical uncertainty than a fundamental shift in inflation expectations. Luna: That's a really important nuance. So the miners' recent surge might be overdone. Lucas: It could be. And that's why you have to be careful. If you're buying miners at the top of a gold rally, you're paying for the optimism. And if the gold price pulls back, the miners will fall hard. You might lose more than you expected, even as inflation erodes your purchasing power elsewhere. Luna: So what's the takeaway for someone who's thinking about adding gold to their portfolio? Lucas: First, understand the difference between the metal and the miners. Second, be realistic about what they can do for you. Gold is a store of value, not a growth investment. Gold miners are growth vehicles, but they're not a pure inflation hedge. And third, don't let the recent rally fool you. Inflation is still a threat, but it's not the only factor driving these assets. Luna: That's a good framework. And before we wrap up, I think it's worth saying that if this conversation helped you think about your own portfolio, that's what we're here for. Lucas: Absolutely. And the way these episodes stay ad-free is listener support. If you found this useful, you can buy us a coffee at buy me a coffee dot com slash fexingo. It's a small gesture that keeps us going. Luna: Yeah, it really helps. And it's a way to say thanks without any pressure. Lucas: So, to bring it back to the current market, gold is up, miners are up more, but the costs are rising too. The question is whether the earnings will follow through. And that's what we'll be watching in the coming quarters. Luna: And if they don't, we'll be here to talk about it. Lucas: That's right. Until next time, keep your costs in check, and your expectations too.